Taleb Bets on Hyperinflation, or even Deflation

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June 4th, 2009 | Add a Comment

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Universa Investments LP, the hedge-fund advised by “Black Swan” author Nassim Taleb, has a new strategy where they’re betting that the massive stimulus efforts of global governments will lead to hyperinflation. The governments pumping money into the economy cannot prevent hyperinflation, and in the loger run will lead to deflation as well . The strategy has also been reported by the Wall Street Journal and Bloomberg this week.

Universa manages $ 6 billion of funds with Wallstreet ‘hotshot’ Mark Spitznagel as the CEO who, together with co-investor and buddy from Wall Street Taleb, bets on extreme market moves and severe inflation. The hedgefund investing strategy is simply based on the principle that nobody knows where inflation is headed, certainly not those who think they do…

“Policy makers have no control over the outcome of their actions,” Taleb said. “The plane they are flying will either hit the mountain, which is hyperinflation, or crash in the ocean, which is deflation. There is a chance of the pilot hitting the runway. But if he’s not skilled, it’s less than he thinks.”

Universa’s strategy is based on the purchase of deep out-of-the-money options; call and put-options. These are options where the price is lower or higher than the market price of the underlying security. A put option gives the buyer the right to sell a security at a set date (with the intrinsic value as the maximum) and a call option gives the right to buy a warranty.

Universa’s funds doubled returns

Taleb, as the founder of the New York hedge fund, Empirica LLC, spent six years, before closing in 2004, to build a strategy based protecting investors against declines in the market, while profiting from the extreme fluctiations at the same time. Some funds of Universa more than doubled since the bankruptcy of Lehman Brothers Holdings Inc. and the following collapse of the financial markets.

He wrote in “The Black Swan: The Impact of highly improbable”, that history is studded with rare, high impact events. “The options are not as expensive as they should be,” Taleb said, “because the market is not focusing on ” significant events.”

Universa’s CEO and Wallstreet ‘hotshot’ Spitznagel runs the Black Swan Protection Protocol, which buys puts and calls on a portfolio of stocks and the S&P 500 Index Futures. Universa’s portfolio is overseen by Taleb and Spitznagel.

Nassim on CNBC talking about hyperinflation

For further discussion read also the insights of Nouriel Roubini on this matter, who together with Taleb also predicted the current financial crisis.

Nouriel Roubini is also a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, and a weekly columnist for Forbes.