Spitznagel runs a fund that specializes on so-called "tail-risk events", i.e. he profits from extremely unlikely economic scenarios such as hyperinflation or violent economic crashes. He profits more the more assets he has under management, because he charges his clients a performance fee of probably around 20% of profits. So part of his job is to constantly find new investors by telling them that the worst economic crisis is just around the corner. And how he he just happens ot have the right solution.
If his fee is based on profits, he needs to be correct some of the time. The types of events you mentioned aren't all hype and he can't will them into existence, so maybe he's on to something?
No idea about his specific fund's pricing but the "traditional" pricing model for hedge funds is 2 and 20, ie, 2% of assets under management plus 20% of profits.
But also, a performance fee is kind of like an option in that it has an asymmetrical payoff - if you make 100 in profit, you get 20, but if you lose 100, you don't have to pay 20. All other things being equal, the expected value of a performance fee will increase with portfolio size as long as there is a chance you are right (and there is always a chance you are right).
Yes, the predicted events will have to come to pass eventually to collect on the performance fee. Nobody (not even this guy) knows when that will happen, but everyone knows that it will happen eventually, and in the meantime, you can position yourself so as to maximise the payoff when they do.
I believe most hedge funds also charge a fee on total assets under management regardless of profitability, so he’d be profiting just by luring in new customers, profits not necessary.
>If his fee is based on profits, he needs to be correct some of the time. The types of events you mentioned aren't all hype and he can't will them into existence, so maybe he's on to somethin
So all he's doing is timing the market. That's it. And here's the thing: it's impossible. Statistically, he and everyone else are on average bad at it. For example, over the past year he and many folk have predicted recessions, depression, stagflation and even collapse. And here in the US they've been entirely wrong. And if you invested according to them then you lost a lot of money.
The reason why this is a bad investment is because the opportunity cost of what you could be doing with your money during all the time that he's wrong up until he's right. And then you have to hope that when he's right, it makes up for all the time he was wrong. Statistically, it's unlikely.
Your best bet is to make the best investment you can that pays today, not a bet on a payday that could happen tomorrow... Time in the market beats timing the market.
