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The Apocalypse has not arrived — but that hasn’t stopped some of the country’s wealthiest investors from betting on it.
The investors, mostly pensions funds, hedge funds of funds and deep-pocketed individuals that were burned during the financial meltdown in 2008, are jumping into these so-called Black Swan investments that carry promised returns of up to 1,000 percent — if another financial Armageddon strikes.
The Cassandras of the hedge-fund world that are offering these funds — also called tail risk funds and often with a geographic focus — would suffer terribly in the absence of disaster.
About 15 Black Swan funds, most of them managing under $1 billion, have sprung up since the 2008 crash.
To be sure, most investors are just dipping their toes into such funds. Still, one JPMorgan Chase survey estimated that these funds control more than $40 billion.
The outsize returns offered by these funds, in theory, will help offset the huge losses their more normal investments are expected to experience.
The hot sector has attracted such well-known names as Saba Capital’s Boaz Weinstein, Hayman Capital’s Kyle Bass, Corriente Advisors’ Mark Hart, and Universa’s Mark Spitznagel.
But until the next crisis hits, these Black Swan funds are for the birds — all are in the red this year.
Universa is also advised by Nassim Taleb, who became a celebrity after his book “Black Swan,” seemed to foresee the 2008 crash and gave these fund types their moniker. Black swans are rare events that can’t be foreseen, according to Taleb.
But that hasn’t stopped hedgies from identifying risks that they think will return outsize payouts.
When markets are buoyant, of course the funds lose money. Through August, Saba Tail Hedge was down 16 percent, Pine River Tail Hedge had fallen 23 percent and Corriente Europe Divergence is down 24 percent, according to investors.
Bass’s Japan short fund, which he launched two years ago, is down more than 60 percent since inception. By design, it will lose all of its investors’ money in three years if Japanese bonds don’t go into a tailspin.
Universa, which started the Black Swan trend when it gained more than 100 percent during 2008, is the oldest and largest, with $6 billion under management. It is also one of the most bearish.
Spitznagel, the Universa boss, argues for the abolition of central banks but finds himself on the downside of that battle this year.
Critics of Black Swan funds say the fad has started to wane.
“People are quickly losing any interest they may have had in Europe tail hedge,” said Mike Hennessy, whose firm Morgan Creek Capital invests a small percentage in some tail funds. “General or US tail hedges are also starting to lose interest from some investors.”