Special Research


Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities (Jan 2015)
Chitpuneet Mann, Mark Spitznagel, and Brandon Yarckin

The introduction of asymmetric beta to the CAPM framework can allow an investor to construct a portfolio with expectations well above the security market line. Incorporating asymmetric beta provides evidence of a mispricing in certain payoff profiles, namely tail hedged equities, that can be analyzed by using variants of the CAPM type of framework. CAPM based asset allocations are misspecified and ill-equipped to handle asymmetric returns.


The Austrians and the Swan: Birds of a Different Feather (May 2012)
Mark Spitznagel, Chief Investment Officer

What is a black swan event, or tail event, in the stock market?
- It depends on who’s asking.
- To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well over 40%)—like pretty much all that came before in the past century—will certainly not be a Black Swan, nor even a tail event.
- Nonetheless, the black swan notion is paramount—in perception: Market participants’ failure to expect a perfectly expected event—that is, they price in only Anglo swans despite the Viennese bird lurking conspicuously in the weeds—much like what is happening today, brings tremendous opportunity.


The Dao of Corporate Finance, Q Ratios, and Stock Market Crashes (June 2011)
Mark Spitznagel, Chief Investment Officer

This white paper provides clear and rigorous evidence of a direct relationship between overvaluation and subsequent extreme losses in the aggregate stock market.
Of equal importance is the use of the Q ratio as the most robust aggregate overvaluation metric, which isolates the key drivers of valuation.
At current valuations (Q ≈ 1.04)—and if this 110-year relationship continues—there is an expected (median) drawdown of 20%, and a 20% chance of a larger than 40% correction in the S&P500 within the next few years; these probabilities continually reset as valuations remain elevated, making an eventual deep drawdown from current levels highly likely.