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Bill Gross’ Bet Pays Off as PIMCO Profits From Black Swans

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Staying true to Pacific Investment Management CIO Bill Gross’ “new normal” forecast, PIMCO’s hedged bets are paying off.

“Black-swan funds run by Universa Investments LP and Pacific Investment Management Co., designed to protect against financial cataclysms, paid off this month as stocks took their steepest dive in almost three years,” Bloomberg reports.

A so-called black swan is an investment term used to describe an unforeseen market event that either positively or negatively impacts returns.

“Black-swan clients of PIMCO, manager of the world’s biggest mutual fund, saw gains this month of as much as 5.5 times the premiums they paid, according to Vineer Bhansali, a Pimco portfolio manager,” Bloomberg notes.

Further, Universa, a hedge fund founded and owned by Mark Spitznagel that consults with New York University professor Nassim Taleb, “had a 10-fold return this year through Aug. 8 on the capital in its black-swan accounts.”

In his now-famous “new normal” speech, Gross said that we are living in a time of deleveraging and reduced economic expectations, and he argued that the downshift in global demand increases competition for a slice of the world’s smaller economic pie.

From July 29 through Aug. 8, the 13% decline in the benchmark Standard & Poor’s 500 Index “may bolster demand for the strategies, also known as tail-risk insurance, that hedge against rare events that can cause financial markets to collapse,” the news service says.

“Tail risk refers to the visual representation of market outcomes on a bell curve. Most outcomes occur along the middle of the curve, while extreme events are seen at either ‘tail,’” Bhansali wrote in commentary released this week. “As observed during the brunt of the credit crisis from 2007-2009, during the stock market “flash” crash of 2010 and again during the last week, the value of not just equity put options but options in many other risk assets exploded up as the markets felt more insecure.”