#1219 Scott Patterson | CHAOS KINGS: The Men Who Profit Off Disaster

Scott Patterson is the author of a brand new book, 'Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis.' In this book, he breaks down two of the greatest traders in history, Nassim Taleb and Mark Spitznagel. At Universa hedge fund, which both of them have set up and run, they are returning over 100% annually based on audited returns. They have been doing that for over a decade, one of the great runs, but the strategy they employ is even more fascinating. ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Scott Patterson is the author of a brand new book, Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis. In this book, he breaks down two of the best traders in history, Nassim Taleb and Mark Spitznagel. Now, when I say they're some

• 0:45Anthony Pompliano?

  of the best traders in history, you may be scratching your head wondering what I mean. But at Universa, which both of them have helped set up and run, they are returning over 100% annually based on audited returns. They've been doing that for over a decade. It's one of the great runs, but what's more interesting is the strategy that they employ is not going long equities. Instead, they buy out of the money options and wait for big market crashes. This book is fantastic, and this conversation with Scott is even better. Here's my conversation with Scott Patterson.

• 1:21Speaker 01

  The action's on the court, and as the official beer sponsor of the NBA, Michelob Ultra is getting fans closer to the game with a chance to win courtside seats, merch, and more. Visit michelobultra.com/courtside to enter. Michelob Ultra Courtside, 26 to 27. No purchase necessary. Open to U.S. residents 21+. Begins on October 1st, 2026 and ends on June 30th, 2027. Multiple entry periods. See official rules at michelobultra.com/courtside for free entry, entry deadlines, prizes, and details.

• 1:49Anthony Pompliano?

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 2:13Anthony Pompliano?

  All right, guys. Bang, bang. I've got Scott Patterson here. Scott is the author of Chaos Kings, How Wall Street Traders Make Billions in the New Age of Crisis. It's a fantastic book, specifically covering Nassim Taleb and Mark Spitznagel. Scott, I thought a great place for us to start our conversation would be around this idea of a crisis hunter. That is a phrase that is used a couple of times in the book and seems to be a great way to label what these guys are doing. Is that a new concept or have people always been kind of hunting crisis? It's just now with the way that the finance industry is set up, you can actually make money off of it?

• 2:46Speaker 02

  Yeah, it's interesting. Crisis Hunter was what they, Nassim and Mark called themselves when they launched their first hedge fund, Empirica. And it was also one of the original titles of the book, Crisis Hunters. Talking with the publisher, we changed it to Chaos Kings. It's a little catchier, but they, so they invented this concept back in the late 90s. It evolved in their first hedge fund, Empirica. And as far as I know, no one had ever created a strategy like this that delivers these explosive returns when the market crashes. And it was pretty

• 3:25Speaker 02

  successful back then. They shut it down mainly because Nassim couldn't handle the stress of the trading because it's, it's a very stressful strategy because you actually lose a lot. You're consistently, you don't, you don't lose a lot of money, but you're using, losing a lot over time. The idea is yet you might lose like a year or two, and then when the market crashes, you make way more than you lost. That's how it's supposed to work. Relaunched it, Mark relaunched it in 2007 with Universa and pretty good timing because 2008.

• 4:03Speaker 02

  Saw the global financial crisis. And an interesting story I tell in the book is how when they launched Universa, which people look at now as being this very successful hedge fund managing billions of dollars. No one wanted to invest. It was such a weird, unique strategy that people just didn't get it. They traveled the country, talking to portfolio managers, pension funds, family offices. And, you know, everybody looked at this and said, you know, wait a second, I'm going to be losing money month after month on this thing like that's terrible. You know, traditional Wall Street strategies like very smooth, consistent returns.

• 4:44Speaker 02

  Problem is, strategies like that often have what Nassim calls hidden risk. And they can suffer a lot during these crises. So they have a very lumpy return, you know, year after year, they're losing several percent. And then all of a sudden they make a thousand percent or 2,000%. And that's, it's designed to be like, you know, time to crashes protects portfolios. It also gives investors a big chunk of cash when everything else is down. So they can take that and plow it back into the market.

• 5:21Anthony Pompliano?

  So you start the book talking about Ackman, Bill Ackman, obviously during the pandemic. He had put on basically an insurance protection using somewhat similar strategy, a couple of billion dollars there that was able to offset losses and kind of a long portfolio. Talk a little bit about this idea that like in this hyper connected world, people are predicting that there's going to be more and more volatility. And ultimately what this is doing is it's profiting off of that volatility. And so, yes, Nassim and Mark seem to have kind of pioneered this as a standalone fund with a specific strategy. But is it really that different than maybe some other hedge fund managers may be doing when they're hedging or when they're trying to specifically protect the portfolio that is long?

• 6:05Speaker 02

  It depends on how the strategy is implemented. So you know what Ackman did in early 2020 was a strategic trade based on his assessment of what was going on in the world with the pandemic, with markets. And he saw early on that the risk that he understood COVID posed to the world wasn't being priced into assets yet in say, you know, February, early March. So he was able to load up on these positions pretty cheaply. He, I think he only put in like $26 million and that turned into 2.5 or 2.6 billion when, when the market crashed.

• 6:47Speaker 02

  So that's a strategic trade made on timing, like just similar to what a lot of the, you know, the big short guys did for the housing market in the mid 2000s. That is not what Universa does. Their strategy is basically you always have that big short on, no matter what's going on, you don't make any predictions, you don't try to time things, it's just there. Because according to, you know, Nassim's Black Swan view of the world is that nobody can predict these things. They come out of the blue. They happen so fast that it's extremely difficult to, to trade on them like, you know, Ackman did it.

• 7:29Speaker 02

  He, I, I see what, you know, he did in early 2020 was a trader, you know, at the top of his game. I mean, he was really moving. He, he, and one of the crazy things that he did was, you know, he got those billions and he put a lot of it back in the stock market in March of 2020, which is, you know, who, who does that? But that trade earned him another billion. This is something that, you know, it's, it's just very hard to do on a consistent basis year after year. So the universe strategy is you don't time things, you just put it on, it's a, you know, what they recommend is you put about 3% of your portfolio into that tail hedge and the

• 8:13Speaker 02

  rest, that frees up your, uh, rest of your cash to put into stocks.

• 8:18Anthony Pompliano?

  Now this has obviously become a very, very popular strategy. If you just look at the AUM, right? I think the latest numbers that you include at the end of the book is Universa has about $20 billion of assets under management. They have 21 employees, right? So a billion dollars of AUM for every one employee. And you mentioned that when they launched, they only had $300 million or so of assets. And so as they have got more and more adoption, they've now become one of the top 25 largest hedge funds in the world. When you see that, is that just people kind of buying into the idea of the kind of tail hedge? Is that them doing a better job of marketing? Like, what's driving so much AUM going into that strategy now? And is it something where, you know, they went from 300 million to 20 billion on their way to 100 billion? Or how do you see kind of that future

• 9:03Anthony Pompliano?

  life of how big the fund could actually get?

• 9:05Speaker 02

  Yeah, their AUM has moved up and down a lot over the years. So it jumped up pretty quickly after the global financial crisis. And then it's, you know, one of the challenges they've encountered is keeping investors in the strategy because after a few years, a lot of them look at it and say, hey, you know, I'm losing this money all these, you know, past few years. I don't think the market's going to crash. Everything looks fine and they pull out. So I tell some humorous and sad story really about CalPERS and how they were making a big investment in Universa in,

• 9:49Speaker 02

  starting around 2016, 2017. They were putting billions into Universa. And by late 2019, they had about, I think, a position of about $5 billion. And then a new manager took over, looked at the tail hedge and said, you know, this is a waste of money. We're just losing cash. It's never going to get big enough to matter for us because we're hundreds of billions big. So in early 2020, a couple of months before COVID.

• 10:25Speaker 02

  Really hit. They eliminated their entire position at Universa. So that's one of the hard things about this strategy is keeping people in it. So Calpers gave up a lot by pulling out. Why, why is it so big? I think that, you know, the strategy definitely is catching on and more and more funds are getting into it. I've been getting feedback from fund managers, tailhedge fund managers who've read the book and say like, oh, it's great. You're writing about this because it's really important and it's effective. I think people are starting to figure out it's effective and this I write about and as Mark and Nassim have, have talked about, their strategy

• 11:08Speaker 02

  doesn't fit within the standard portfolio theory propagated on Wall Street and in finance schools that try to, that favor strategies with low volatility that are smooth risk adjusted returns.

• 11:27Speaker 02

  You, you manage your risk in a way to maximize your returns. They do pretty much the opposite of what modern portfolio theory recommends. They have extremely volatile returns, losses year after year, and then big jumps. And that just doesn't fit within the models. I think that people, you know, Wall Street is starting to figure out like, okay, doesn't fit the model, but it works. Right? So, uh, yeah, there's a, there's a lot more funds out there. Universe has got 20 billion. We'll see if it grows. Maybe, you know, people really freaked out after 2020, the pandemic. And I think it woke up a lot of people to the fact that, you know, there is

• 12:10Speaker 02

  increasing risk out there. And, you know, as globalization expands, as connectivity expands, that's, you know, one of the driving forces of COVID was, you know, airplanes, people getting on planes, you know, from the blonde fashion show and, you know, flying back to America or other parts of Europe, carrying the virus with them. That a lot of epidemiologists say this, this is a new world we're living in where these viruses are going to spread more rapidly and, you know, create the kind of chaos that we saw that year. So I think that that's, that's one of the big things that's driving the money flows into these tail hedge funds.

• 12:53Anthony Pompliano?

  What's fascinating to me about both Nassim and Mark is that they both kind of figured out this strategy separately in their past life before they started the hedge fund, right? And you tell both stories, obviously with Nassim kind of doing it in the finance world and trying to understand it. But also you talk about this principle of like, maybe most of finance is based on the idea that everything is normal and then the outlier is the volatile situation. But maybe actually we should flip that on its head and the volatile situations are the normal times and it's the periods of kind of no volatility that is the outlier. And the reason being, you know, if you take away the top 10 trading days a year or something, it's like pretty much flat, you know, year in, year out. And

• 13:37Anthony Pompliano?

  so it really is all about the big moves either up or down. And so is it something where we've almost educated an entire generation of people in finance in a perspective that fundamentally Nassim and Mark just reject because of the work that they had done and kind of the experience they had going into this?

• 13:57Speaker 02

  Yes, I, you know, I think it's one of the key insights that they both had is that it's, it's not focusing on the day to day returns. Those are going to come, you know, if you're in the market, you don't really need to work that hard to get those returns. What you really need to work hard on is the big crashes. And Mark likes to talk about this scenario that I think is pretty illuminating, where if you say, if you have a hundred dollars in a, in a trade and it goes down 50%, in order to get back to where you were, you need to make a hundred percent return. Which is pretty daunting math, right?

• 14:42Speaker 02

  So what you need to do is to protect yourself against that 50% decline. And if you can do that, you're going to live to trade another day. And the, you know, the incremental returns will just come if you are in the market, you know? You don't need to have a real fancy trading strategy.

• 15:01Speaker 02

  And yeah, I, I, you know, tell this story about Mark when he was an early, you know, cub trader at the Chicago Board of Trade in the eighties. And he, he learned this lesson with this veteran commodity trader Everett Clip, who taught him something that's very contrary to what, what most investors are, are told, is that you need to love to lose. And, uh, and this trader just beat it into him, uh, over and over again, telling him, you know, this is against human nature, of course, but you need to get this into your strategy. And what that meant is a, you know, trader on the floor of the C bot,

• 15:44Speaker 02

  is if your position starts going down, get out of it, just get out of it right away. Learn, you know, live to trade the next day and you'll survive. And, you know, he, that, that is kind of, it's very similar to what Nassim was doing at the same time by buying these derivative contracts that usually lose money. They're, they're big bets on extreme moves. Usually doesn't happen, so you lose money on that trade. But when it does, when you do get an extremely volatile event, you make, you know, way more than you lost, uh, hu- huge returns. You know, as like I, I also tell a story of Nassim's trading on Black Monday,

• 16:26Speaker 02

  when positions he bought for, you know, a couple pennies, were trading for, you know, four or five bucks. And that's the, the magnitude of that return does not fit within any parameter of a, a, you know, a model. It was so far outside the models that it, it was something like a trade that like that could only happen in, you know, once every five universes, according to the, uh, to the math. So he learned early on, both of them learned lessons, kind of, you know, from different perspectives. But when they met in late 99 at New York University, uh, New York University, um, they, uh,

• 17:06Speaker 02

  they had this mind meld where they get just kind of, you know, saw that they were doing the exact same thing. And it just, it worked. They really clicked.

• 17:15Anthony Pompliano?

  So they're two very different people as well, right? You at one point talked about how like Mark went a couple of times, I think, to kind of the intellectual debates, uh, that Nassim would hold. He'd kind of like hold court in these like cafes or libraries or whatever. And Mark basically was like, I'd rather like jump off the building, right? Like this is horrible. This is not for me. Uh, I think you described him as like more serious. Uh, whereas Nassim was very much like kind of an academic, uh, in nature.

• 17:42Anthony Pompliano?

  Is it a thing where opposites attract? Cause you also talk about this idea, like they just enjoyed walking around New York City or other places and kind of talking and, and, you know, arguing and debating and all this type of stuff. Or is there something else driving the relationship as to why they had so much respect for each other? And why they had been able to work together and, and really kind of pioneer the strategy?

• 18:01Speaker 02

  Yeah, they definitely had similar worldviews, like they were both into libertarianism. Um, they read some of the same philosophers like Popper. Uh, so there definitely was a chemistry there that worked. And at the same time, like you say, they're totally different, uh, people. Nassim is, you know, he calls himself a funer, you know, which basically means like strolling around town aimlessly and jump, you know, popping into bookstores and museums. And I always envisioned, you know, him wearing these loafers and a silk scarf.

• 18:39Speaker 02

  You would never, as I say, you would never hear Mark Spitznagel call himself a funer. Uh, he is the opposite of that.

• 18:46Anthony Pompliano?

  He's an anti funer. He's the anti-fanure.

• 18:50Speaker 02

  He's anti-fanure, definitely. He also likes, you know, daredevil hobbies like soaring on these engineless planes, skateboarding. You've never seen Nassim Taleb on a skateboard. I mean, I would, I would love to see that image. So yeah, they've got, they've got very, you know, different interests in life. Nassim is, as he will tell you, and has told me dozens of times, he does not see himself as a Wall Street guy, as a trader, as a finance guy. He wants to be known as a thinker, as a

• 19:29Speaker 02

  philosopher, as a scientist, which I think he's achieved with his, his books and his research. People still associate him a bit with Wall Street, and especially Wall Street people associate him with that. But I think more, you know, pop, like his more popular image is a, you know, somebody who writes these fascinating books of philosophy. And whereas Mark is very happy to call himself a trader, and that's all he wants to be known as. He has written some, some fascinating books, but they're, they're very trade oriented books. So, you know, I think it's why Nassim couldn't stick with it. He just didn't have the love of the game that Mark does.

• 20:13Speaker 02

  And Mark, as I say in the book, when they shut down their first hedge fund, Empirica, he was furious. He was like, this is a great strategy. Why are you doing this? Don't you realize what we can do with this? And Nassim was just like, I've had it. You know, I can't do it anymore. I think he was concerned about the impact on his health that it was having. And he really stressed out. Whereas Mark was, he, he believed in the strategy. He understood that you had to go through these periods of, of losing, but it was going to pay off. You know, he, he thought. So he relaunched it, you know, shut down Empiric in 2004, started up Universa in 2007, and you know, it's.

• 20:59Speaker 02

  It's done. It's had a very successful run. So he was right.

• 21:03Anthony Pompliano?

  So when you think about um Nasim and kind of wanting to be more of the thinker, the philosopher, the scientist, you know, kind of the non trader, is it almost, um, there's a guy, Rob Henderson, he could talk about like luxury beliefs, right? And in the ability to uh want to be that because you already made the money, right? It is like, uh, uh, if you were just starting out, maybe actually you would be much more focused on Wall Street because it was about the pursuit of uh financial freedom. And then once you get it, now all of a sudden it's like, hey, I don't care about that anymore. Now I want to be more in this other uh realm. Do you get the sense in your conversations with Nasim, like that's part of this is that they actually had so much success early on? And then that provided the opportunity to not worry about Wall Street finance, trading and

• 21:48Anthony Pompliano?

  kind of personal finances?

• 21:53Speaker 01

  The action's on the court. And as the official beer sponsor of the NBA, Michelob Ultra is getting fans closer to the game with a chance to win courtside seats, merch, and more. Visit michelobultra.com/courtside to enter. Michelob Ultra Courtside 26 to 27. No purchase necessary. Open to US residents 21+. Begins on October 1st, 2026 and ends on June 30th, 2027. Multiple entry periods. See official rules at michelobultra.com/courtside for free entry, entry deadlines, prizes, and details.

• 22:21Speaker 02

  Yeah, absolutely. I mean, he he's has said that the money that he made on Black Monday was more than he's ever made in anything else. Nobody really knows how much he made. Um, so he, you know, he says that gave him what he calls fuck you money. And he could just go do what he want. I think he he, you know, he's always been a reader. Uh, you know, I talked about when he was uh a kid growing up in in Lebanon, you know, he was reading all these books. He there was a war going on in Beirut and he was confined to the cellar and he was just reading and reading and reading. Um, so it's it's not like he made money and said,

• 23:03Speaker 02

  okay, I want to, you know, become an intellectual now. I think he always was. Uh, he just um gravitated to Wall Street and, you know, it was the 80s. It was a, you know, popular thing to do. Um, and he he was good at it. And he was also pretty good at math. So, you know, I think the thing is, and I was recently talking to him about this because as you know, this seems a very divisive figure on Wall Street. He's he can be very abrasive. And a lot of people just hate his guts. You know, for one reason or another, either he's attacked them or, you know, on Twitter, you know, or they just think he's an asshole.

• 23:47Speaker 02

  I think part of it is, especially among the top tier hedge fund managers is jealousy. You know, I know a lot of hedge fund managers. I covered the industry for years and they all almost to a one see themselves as soaring intellectuals with, you know, they've they've read a lot. They want to write a book. Many of them, many some have written books, haven't done that well. And he he's kind of done what they all, you know, secretly want to do is become, you know, this popular thinker, not known for the money that they've made, but

• 24:30Speaker 02

  is being a, you know, intellectual genius. And I just think that there's there's a lot of jealousy going on there with him.

• 24:38Anthony Pompliano?

  So you don't know this, but during his transition from Bitcoin supporter to Bitcoin critic, he he came at me viciously. And I said to myself, I was like, yeah, I said, look, man, I got no problem with him. I still think of him in incredibly high regard. But I do think that, you know, part of the public like attacking of other people definitely, you know, puts bad taste in some people's mouth. But I always do wonder, is that a requirement? Right? If you're so contrarian, if you have such a high disagreeableness, like, we know that you have to be contrarian and right, in order to kind of make outsized returns. Does that just kind of come with the territory? And if you think of, you know, sports as an example, Michael Jordan, or Kobe Bryant, or, you know, name your, you

• 25:20Anthony Pompliano?

  know, favorite sports person, they got some, you know, skeletons in the closet of personality that people just kind of chalk up and like, well, he's the best, you know, basketball player of all time. Like, what'd you expect? He was just gonna be like this nice guy? No, he's a killer. Right? And it seems like Talib maybe has a little bit of that as well. And maybe that leads to some of the abrasiveness.

• 25:42Speaker 02

  Totally, and he's always been like that. Just looking back at comments that he was making in the 90s about financial models and how stupid many of them are. And I think it took somebody like him to to just say so forcefully that Wall Street's got a problem. It's using all of these models that hide risk and cut out the tails. You know, like value at risk. He's been, you know, complaining about value at risk for decades since the 90s. I found some old writing from him that, you know, was about how flawed that was as a risk model.

• 26:28Speaker 02

  And yet every bank, every hedge fund uses it.

• 26:33Speaker 02

  And, you know, it works 95% of the time, but what, you know, why would you use a model that cuts out the most volatile days, 5% of the time of the year? And say, you know, okay, we're fine. Most of the time, these outliers are going to come along and, you know, we'll deal with them when, you know, so everybody's looking at the, you know, the middle of the bell curve. And Asim is saying, no, that is, that is not what you need to think about. You need to think about those tails. Cause those are going to kill you if, if you don't protect against those. And that's really, I think, more than anything, the innovation that he brought. It, many people criticized him and you could look at, you know,

• 27:18Speaker 02

  one of the chief criticisms he's had to endure is people saying, no, we all knew about tails. And you can find going back decades, you know, research showing that there's these volatile events. There's these fat tails.

• 27:33Speaker 02

  And, you know, people were aware of them, but they weren't incorporating them into their trading models because it screwed everything up. You know, I saw some email exchanges that he, he shared with me with a very senior financial theorist, a Nobel Prize winner, actually. And this Nobel Prize winner was telling Asim, yeah, we know about the fat tails. But the problem is when we put them into our models, it makes things a lot harder. And it's difficult to trade on them. And and it seems like, well, you know, okay, you're you're ignoring reality and that's going to be a problem for you. And it's kind

• 28:18Speaker 02

  of funny, like, after the global financial crisis, value at risk was just completely discredited. I know we at the Wall Street Journal, we wrote about it and how this is one of the problems that the banks had is that they, you know, they didn't see the risk in the in the housing market, because they were just looking at these average returns over years and didn't, you know, it wasn't even in the models. And even a lot of the derivatives that were used, were using these bell curve models with no fat tails. And yet, if you if you look at any financial disclosure from a major bank right now, they're using value at risk, the same thing. And that's how they're managing their risk. Now,

• 29:01Speaker 02

  I think that a lot more are aware of being, you know, concerned about the tails and probably are implementing hedge strategies. So hopefully, you know, that that will protect them the next time there's a crash. But, you know, in early 2020, if the Fed hadn't come in with liquidity injections, like massive liquidity injections and buying bonds and even junk bonds, the, you know, we would have seen the same cascading failures again as we saw in 2008. So it's the Fed that's managing the tail risk right now.

• 29:39Anthony Pompliano?

  It's fascinating to think that, you know, Mark Spitznagel, now with Universa, which Nassim, I think, is still an advisor too, but but Universa has become probably, based on everything I've seen, the best performing hedge fund over the last, you know, 10 or 15 years. I think in the book, you, when you kind of draw the line on the returns, they've averaged over 100% annual returns for more than a decade. Right? And and we've heard of

• 30:06Speaker 02

  Yeah, those are audited returns.

• 30:08Anthony Pompliano?

  Yeah. So like, you know, we've heard of obviously Renaissance and kind of 60%. And, you know, these kind of almost video game numbers, but Universa Specifically, having 100% annual returns over a decade is pretty impressive. But it feels like where Nassim is very public and he's constantly going on television. He's constantly, you know, kind of out there as that thinker, as that philosopher. Mark is much more reserved. He kind of is hanging out on his farm. And yeah, he wrote the books, but I don't see him, you know, kind of volunteering to go and do interviews very often and things like that. And so is that just his personality or how did you read into that?

• 30:48Speaker 02

  Yeah, I think he's definitely not nearly as interested in appearing in public as Nassim is. I think it also, you know, kind of enhances the mystique a bit. You don't see Jim Simons of Renaissance coming on TV.

• 31:08Speaker 02

  And in terms of returns, I, you know, the Medallion Fund at Renaissance is probably unmatched. And for one thing, it's, it's big. It's really big. I don't know how much, how big it is now, but it's, you know, what, last time I was looking, looking at that fund, I think it was 50 billion. And to get the 80% returns on something like that year after year is, is mind blowing.

• 31:38Speaker 02

  I was actually the first reporter to get inside the Renaissance office.

• 31:44Speaker 02

  More than a decade ago, when, when Simons was stepping down. And I, I knew people, so I've written a lot about them, but Universa is definitely.

• 31:53Anthony Pompliano?

  You can't say that, that just move on. What was that like when you go in the Renaissance office?

• 31:57Speaker 02

  Yeah, it was, it was cool because they brought us into their server room. Which had all, you know, these computer, big computers.

• 32:10Speaker 02

  And I thought that was fascinating because I was, you know, looking at these computers and thinking like, what is going on inside those things? Everybody wants to know. They've always been, you know.

• 32:22Speaker 02

  A source of speculation and mystery on Wall Street because they they seem to have cracked the code and they've got all these PhDs and you know, so we walk around the office. It was funny, it's like they're off parts of the building that had a bunch of Chinese programmers and then you go down a floor and they're like, here's where the Russians are.

• 32:48Speaker 02

  So yeah, it was, it was very interesting.

• 32:51Anthony Pompliano?

  When you think of Spitznagel today, you mentioned multiple times throughout the book that he's like on Zoom with his traders from his farm.

• 33:01Anthony Pompliano?

  What is that about? Like, is this just because he's only got 21 employees and the strategy is kind of so simple and just it's about discipline, it's not necessarily about day to day decision making, he's able to spend time doing other things or is there something else that we should take away from that?

• 33:16Speaker 02

  I think that it can be, and this is just me speculating because I don't really know what they do day to day aside from, you know, they're buying these far out of the money put options, but I think there is a bit of a machine like quality to the strategy. And he doesn't need to be in the room every day when things are happening. He can see what, you know, what they're doing, what the, what the portfolio is doing. And so it's easy enough for him to, you know, get on Zoom. I think probably he has done a lot more of that since the pandemic, like everybody.

• 33:59Speaker 02

  But if something crazy happens, he can jump on a plane and be in Miami in, in, you know, four or five hours.

• 34:07Anthony Pompliano?

  Yeah. And then when you look out at kind of the strategy itself, even you seem to be a little bit like, okay, I get the general strategy, but how do they actually do it is probably one of the number one questions you get. Yeah. What level of confidence could you say that you could go and explain to someone like the intricacies and the nuances? Is it something where they really are kind of close to their chest, even though they describe kind of the high level, but they won't explain the details? Or is it that the details are so complex that it's just really hard for people to wrap their heads around?

• 34:39Speaker 02

  Again, I can only speculate. But you know, I think that a big part of their strategy, which you can't replicate, you know, on your, you know, interactive brokers trading account is having relationships on well-established relationships on Wall Street that can allow you to put on these big positions in these derivatives, these options that nobody else wants. You know, I think they also have the stomach and the market knowledge to know that these

• 35:18Speaker 02

  positions, you know, which look like, you know, practically idiotic trades are gonna pay off. And you just gotta keep doing it because their, their trade is a bet on a 20% decline in the S and P 500 in a month, which is pretty nuts. Like, you know, I think it's, it's only happened a couple of times. When they launched Universa, the only time that had happened was in 1987, when the, the Dow went down 22.7% in a single day. So that was one of the reasons they had a lot of trouble getting investors was, you know, they look at it and say, well, this never happens.

• 36:02Speaker 02

  So, you know, why would I put money into that? But I think one of the secrets of the strategy is it doesn't, you don't actually need a 20% decline for those, those options to surge in value. You just need there to be a lot of fear in the market that that could happen. And that creates a, you know, sort of feeding frenzy on those positions. Everybody suddenly wants them because it helps balance out their risk in their portfolios. And Universa is there to provide that when everybody wants it. They're the ones who have those positions. They talk about like, you know, they're the only ones with umbrella, an umbrella, selling umbrellas when the storm breaks out.

• 36:46Speaker 02

  So you can sell your umbrellas at a, at a high premium. So it's, you know, I think it's just the market knowledge. It's the contacts that they have. But I, the difficulty of the strategy is maintaining it in the most cost-effective manner that you can. Because if you're trying to do this from your interactive brokers account, you're probably going to lose a lot of money. Month after month, year after year. And at some point, most people I think are going to cut and run and say, forget that. You know, I'm losing money and, you know, and they don't have, they either don't have the cash to keep it up or the stomach to keep it up.

• 37:29Anthony Pompliano?

  Talk to me about the risk of ruin. That seems to be one of the things that really kind of drives, you know, part of their marketing, but also I think across Wall Street. You know, people realize, hey, you can compound capital for a really, really long time and it doesn't take that much to just all of a sudden lose it all. And obviously in these market crashes, that's a huge thing. And something you talk about throughout the book. Why is that so important, you think, as part of their marketing?

• 37:56Speaker 02

  Well, I think it's a real risk, especially when you're using leverage. So, you know, if you're, if you're in trades that are 30 to one, 20 to one, you don't need the market to go down that much to completely wipe you out.

• 38:12Speaker 02

  So that's the risk of ruin. It's also known as gambler's ruin. You know, it's like Russian roulette. If you, you know, you can spin the barrel a couple of times and you might live, but if you keep doing it, you're going to blow your head off. And that's kind of what the ruin risk is, is you may survive. You know, like if you go into casino and you put all your money down on red. You might make it a couple of times, but eventually if you keep doubling down, you're going to lose all your money. And that's, that's the risk they say that they avoid with the strategies.

• 38:54Speaker 02

  They cannot blow up and you know, that's the trade that originally with empirica, Nassim wanted to devise a strategy that can't blow up. It can bleed and you can lose money over an extended period of time, but there's no leverage in it. It's just a, you know, you're, you're buying these options. They expire, you, you know, lost the money on that investment, but there's no way that you can, in a, in a big downturn, with that strategy that you can lose everything. You actually make a lot. It's the, you know, people know Nassim's book, Anti-Fragile. I think that he, he hasn't told me this, but I think that he must have gotten that concept

• 39:38Speaker 02

  with this strategy because it's the ultimate anti-fragile strategy. These put options, you know, you can lose the money on them, but when there's a, you know, big episode of volatility, they become anti-fragile. They become extremely valuable.

• 39:56Anthony Pompliano?

  It, it's fascinating to think about the one thing everyone worries about in blowing up. They figured out a way to hang their hat and say, that's the one thing that we can ensure won't happen. Right? And, and it's almost this, again, this contrarian nature to it. Talk about the 4,400% return. So at the beginning of COVID, I think it was in March of, of COVID, they reported a universe of 4,400% return. There was a lot of people who were kind of, you know, breathtaking away. And they're like, oh my God, that's an incredible return. Then there's a lot of critics who were like, that's bullshit. You know, they lost money before and all the, the critiques that came out.

• 40:38Anthony Pompliano?

  How do you look at that kind of just massive number that they posted in what was one of the most recent, you know, really big market downturns?

• 40:49Speaker 01

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• 41:18Speaker 02

  It's probably where most people don't understand how Universa operates and how they report their returns. So, you know, a lot of funds typically report like if they're a $100 billion fund and they went up to $2 billion, they're going to say, "We had 100% return." So, Universa is managing, what they are actually doing is they're protecting assets and when they tell, they disclose their AUM, what they're actually disclosing is the amount of assets that they have a protection portfolio on. So, if they have,

• 42:00Speaker 02

  you know, they're protecting $5 billion in assets. It's not like they have $5 billion in the market. They actually have a very, a small percentage of that $5 billion actually in the market at any given time of just a few percentage points of that. And that position, that sort of overlay on the portfolio that they're protecting, that what that does is that's what the 4,000-plus percent return is on. So, it's the return on the options that they had bought during that period of extreme volatility in early 2020. That's where you get the 4,000-plus percent return.

• 42:43Anthony Pompliano?

  And so what does that look like in terms of if they had a hundred dollars in the fund? If there's a few percentage points, let's say they had one to five dollars actually deployed at the time in those options. For forty four hundred percent return, that gets them still hundreds of percent on the total capital. But it's not the forty four hundred percent on the entire fund size.

• 43:05Speaker 02

  Right, which would be crazy, right? You know, four thousand percent on five billion. I mean, anybody who knows the strategy, anything about it, they they'd know that that's not what they were saying, but they. You know, people still like to criticize them because either they're, you know, competitors or jealous, or they just like to throw mud at. Nassim and Mark. But, you know, I talked to tail hedge managers and they're what I think irritates some of their competitors is that they don't report. In the same way that Universa does. And they're like, well, yeah, I could have said I made two thousand percent or three thousand percent in.

• 43:49Speaker 02

  Early twenty twenty, but that's not how we report our returns. And like, okay, you know, that's fine. Universa, you know, is the original tail hedge fund. They created the strategy and I feel like is, you know, that gives them the right to do, report returns however they want.

• 44:07Anthony Pompliano?

  Yeah. What's been the most surprising part? I mean, you've known these guys for a while. As you wrote the book, what was the part that kind of stuck out to you or maybe the biggest insight that you weren't expecting?

• 44:20Speaker 02

  I think that, you know, how you can take this worldview that they've learned. At as a trader, as an asset manager and managing risk. And how that can be applied to other parts of the world.

• 44:37Speaker 02

  Like, you know.

• 44:40Speaker 02

  Climate risk is something that I write about in the book and something that Seem has written about. And with risks like that, you have, there's these potential extreme events that could happen. You don't really know statistically how likely it is.

• 45:00Speaker 02

  But the uncertainty of the potential outcome of these risks is so high that you need to be very careful about managing that risk. And I think that with black swans in the market,

• 45:17Speaker 02

  you don't know it's going to happen. You don't know that there's going to be a crash, but the uncertainty about the potential of it means that you need to be pretty careful about it. You know, like, Seem likes to say, if you don't have trust in the pilot, don't get on the plane. It's the uncertainty of the possibility of these extreme events that people need to take into consideration. But it's also uncertainty that causes people to say, well, you know, we don't really know how bad this is. Why should we take precautions against it because we don't really understand it that well?

• 45:59Speaker 02

  And you know, you saw that with COVID in 2020, was there were a lot of people, especially early on, saying, well, we need to study this thing more because we don't understand the properties and how contagious it is or how deadly it is. So let's just wait and see and figure it out and then we can decide what to do. And it's that wait and see mentality that's the problem is we wait too long and game over, you know, and I think that's partly what caused the US and other countries to have such, you know, high fatality rates in 2020, 2021.

• 46:40Speaker 02

  And, you know, it's, I think the original idea of the book actually came in early 2020 when I saw what Universa did.

• 46:50Speaker 02

  And around the same time, Nassim and some co-authors had written a paper in January of 2020, warning about the potential extreme risk that COVID posed and saying, we really need to be careful with this thing. It poses the risk of ruin. Let's take precautions. They were actually in contact with officials at the White House and they communicated that paper to the White House. And it made me think like, what is it about Nassim's ability to see the extreme risk posed by COVID that kind of maps over onto what Universa did?

• 47:33Speaker 02

  Because it's, you know, the same time you have, you know, two people who have been engaged in the same market activities, coming out looking pretty smart when everybody else is in total chaos and losing money, not understanding COVID. That's the thing that I thought, you know, what is it about their, the way that they see the world that enabled them to get through this period of crazy risk and come out looking pretty smart?

• 48:06Anthony Pompliano?

  And then when you look at Spitznagel, what do you think separates him from kind of everyone else? Right? Is it something about the discipline and, you know, even Nassim kind of said, hey, I don't want to do this anymore. Right? I don't want to deal with almost the mundane kind of nature of it. Maybe he didn't want to be the front man, whatever. But like Spitznagel has stayed with this the entire time. What is it that separates?

• 48:34Speaker 02

  Yeah. Um, yeah. Well, I, you know, I write about how when he was growing up, he was a very intense kid. And apparently, like he told me he'd walk around his house, muttering to himself, saying, discipline, discipline, discipline. And at the time, that was about his practicing on French horn. And he actually became like a, you know, one of the best French horn players in America and was accepted to Juilliard and was going to become a professional French horn player. And then apparently,

• 49:09Speaker 02

  His brother told me the story that he he found out how much like the first seat French horn player and you know, some New York Symphony made per year. And it was like less than a high school teacher made. And he said, forget that.

• 49:29Speaker 02

  And it, you know, around the same time he'd started going to the Chicago Board of Trade and just became fascinated with it. He just fell in love with it. You know, I tell the story of how his father one day brought him to the C bot and he it wasn't at all what he expected and he, you know, the energy of it, he just fell in love with it. And I think it just something in him clicked. That, you know, it was like, this is, this is for me. Like, I wanted, I want to do this. And he just dove into it and it's just all, you know, I think he's, it's just a natural fit. He's a, he's a natural born trader.

• 50:08Speaker 02

  And the discipline that he learned, you know, under clip about learning to lose. I think that mentality has separated him from most other traders who who do not like to lose. It's also, you know, I mean, if you think about the incentive structures on Wall Street. You, you, most people, traders or money managers or whatever, they have their eye on their annual bonus. Which that's all that matters for them is how big that bonus is going to be. Year after year. If you're losing money

• 50:48Speaker 02

  year after year, you don't get a bonus. There's no bonus. So the incentive structures on Wall Street are just designed to pretty much force traders to adopt a strategy that's going to give them.

• 51:03Speaker 02

  You know, steady returns, but they're taking this risk. And I think that, you know, the, the bet is, well, if I can, if I can hang on for five years, you know, and before I blow up, I'm gonna do, I'm gonna have, you know, a lot of money. Uh, maybe they can make it longer than that, but uh, um, that's not the way Universa operates. They, you know, they make their money very incrementally or very, very, uh, rarely. And, you know, I asked, uh, I asked them, you know, how do you get your traders to stick with this? Because they don't have that, you know, uh, incentive of the big bonus at the end of the year.

• 51:45Speaker 02

  And they said, the way they get them to think about is like having an option, uh, for in a company. And, you know, when it goes public, you're gonna make a lot. You're gonna, you know, it might be, you know, a few years where you're, you're not gonna get much of a return, but when those options pay off, you're gonna get a lot.

• 52:05Anthony Pompliano?

  I want to read you a quote. This is a banker talking about a gentleman named, uh, Suliman Olayan. He is, uh, one of the richest guys in Saudi Arabia, built a massive conglomerate, a bunch of different businesses. And his banker said the following. You could see clearly that he wanted to be successful. You didn't see him in bars or nightclubs. He was a serious person. He was always looking for new business and he wanted to seize every bit of opportunity that came his way. He was almost compulsively ambitious. The reason why I thought of that specific phrase is he was a serious person. You could clearly see he wanted to be successful. Like all these points of this banker talking about Suliman is very similar to what you're saying about, uh, Mark Spitznagel. But then it talks about, he was almost compulsively ambitious.

• 52:50Anthony Pompliano?

  And one of the interesting things about this strategy is to some degree, you have to temper ambition of doing things outside of the strategy, of losing discipline, of trying to get too smart or too greedy. And so it's fascinating to me, right? And I think in kind of reading the book of like, you have to be ambitious enough to want to do this and kind of stick with it, but you also have to, uh, be self-aware enough to know that if you get greedy, if you become undisciplined, you basically ruin the strategy and all of the value, you know, dissipates very quickly, right?

• 53:21Speaker 02

  Yeah, yeah, it's it's a model. It's a it's a strategy. And you know, Nassim has said he's never seen Mark stray from the model. Once the the the protocol, as they call it, the black swan protocol. So he it's it is definitely discipline.

• 53:42Speaker 02

  And it's, I think it's just hard to do. And one important thing about the universal strategy, you know, as I point out in the book is this is not designed to be a strategy for your whole portfolio. No one would put all their money into a universal fund. You actually, based on the historic returns, you actually would have done pretty well.

• 54:09Speaker 02

  With, you know, very lumpy gains. It's meant to be a overlay of a broader portfolio of stocks and maybe some bonds. So, you know, what Mark says is we recommend our clients that you put 3% into our fund and the rest you can put into stocks. And the idea is that, you know, traditional portfolios,

• 54:36Speaker 02

  you know, that many pension funds follow is the 6040 strategy of 60% in the stock market, 40% in bonds or other less risky assets like, you know, maybe some gold and currencies, commodities.

• 54:53Speaker 02

  The problem with that strategy, according to Mark, is that you're giving up a lot of upside in the market. And that's really where your returns come from. And the and the market has historically done pretty well.

• 55:08Speaker 02

  The problem is that the market can be really volatile sometimes and go down a lot. So if you protect yourself during those volatile times and you have a trade that will give you this big infusion of cash when everything is down and are, you know, more attractive, that you're going to do pretty well over time. And that's basically, in a nutshell, what what their strategy is.

• 55:35Anthony Pompliano?

  It's fascinating when you see how long they've been doing this. And you mentioned that there's a lot of people on Wall Street that have started to kind of wake up to this. Do you anticipate that there will be many, many more copycats, including could we see a BlackRock? Or other types of, you know, fidelity, like very, very large asset managers start to introduce these strategies as well?

• 55:59Speaker 02

  Um, they, you know, some are, and there's some ETFs that are coming out.

• 56:06Speaker 02

  I somehow suspect that if the market continues to be pretty calm and, and, you know, trade up and down, but, you know, not the volatility that we saw in 2020, I kind of bet that, you know, the popularity of the trade is going to fade. And as we've seen before, I mean, after 2008, a bunch of copycats jumped in and launched their tail hedge funds and hung around for a few years. It's just the nature of this strategy that it's very tough to maintain over a long period of time. So we'll see, I mean, you know, universes obviously attracted a lot of money and, and that's going to cause people to say, hmm.

• 56:52Speaker 02

  I like, I like those

• 56:56Speaker 02

  management fees. So yeah, there might be some more, but we'll, we'll see. I'm a bit skeptical.

• 57:02Anthony Pompliano?

  Scott, Chaos Kings is the name of the book, How Wall Street Traders Make Billions in the New Age of Crisis. It is not only fascinating from education standpoint, I think that one of your skills is you also write in a very entertaining fashion. So people can kind of read it. You just keep wanting to read more and more. I really enjoyed this book. So anyone who wants to go pick it up, Chaos Kings, Scott Patterson. I highly suggest you do that. I'm assuming you can buy this Amazon or any of the various books. Also audiobook, ebook or physical book. But Scott, if somebody wants to find you on the internet or kind of follow up with you on anything you talked about today, where can we send them?

• 57:40Speaker 02

  Yeah, I'm on Twitter at Patterson Scott. I've got a website, Scott Patterson Books.com. And yeah, you can find the book on Amazon or Barnes Noble forever.

• 57:54Anthony Pompliano?

  Awesome. Well, listen, I really appreciate you taking the time to do this. As I mentioned, the book is fantastic. So I appreciate you entertaining me for a couple of hours as I, as I read it. And we'll definitely have to bring you back when you write the next one.

• 58:07Speaker 02

  Would love to.