15. Life Settlements — Several hedge funds literally invest in the life insurance claims of others, hoping they’ll die early so they can collect. The Private Placement Memorandum’s for these funds often cite ‘risks’ such as cures for cancer or heart disease, and other medical breakthroughs that could unexpectedly prolong life.
14. Madoff Claims. Some funds specialize in purchasing the claims of bankrupt companies or private partnerships. An example? The claims purchased from victims of the Bernie Madoff scam were one of the highest performing investments in 2011-2012. Hedge funds were able to buy these claims for pennies on the dollar and collect as the trustee located more money for the victims (and for the hedge funds).
13. Catastrophe Bonds. Insurance companies will sell off some of their risk to hedge funds or private investors if they have a lot of exposure to a specific geography or type of catastrophic event. Investors collect yield and hope to avoid acts of god like earthquakes, hurricanes, Godzilla, or tornadoes.
12. Litigation Finance. Class action lawsuits are expensive to litigate. Law firms will sell pieces of the future claims from these suits to hedge funds in order to finance the up-front costs. In one recent high-profile example a hedge fund purchased approximately $100m in claims from the victims of an overseas terrorist attack expecting that the government would seize enough assets to pay out the claimants.
11. Water Rights. Several hedge funds specialize in investing in water rights in the Western U.S. and Australia; two markets where you can buy ‘shares’ of water from river systems. The water rights in these regions are broken out separately from land rights and are freely tradeable (similar to how air rights can be separated from most fee simple property ownership.) These investments tend to have a yield component (your annual allocation of water that you can sell into the market), and a capital appreciation component (the value of the right itself). The annual yield tends to ‘ebb and flow’ depending on the annual rainfall in the region.
10. Museum Art. Several funds specialize in art investing. Generally they focus on ‘investment-grade museum-quality’ art (such as Rembrandt’s, Picasso’s, Van Gogh’s, et al) where there is a more established secondary market. These strategies can be popular with high-net-worth individuals not only for the return potential, but also because some allow the investor to hang the art in their homes (once properly insured of course.) A little-known ancillary benefit: If the market for art goes down the paintings can always be donated to museums at their appraisal value, which gives investors a significant tax write-off and de facto downside protection.
9. Film Financing. Movies are big business, and several hedge funds specialize in backing blockbuster motion pictures. Key metrics they analyze include the historical revenue generation of key actors/directors/screenwr
8. Pottery. Similar to the art funds, pottery investors focus on buying investment grade pottery such as Ming-era vases. Interestingly, the thesis is that the value of Chinese art correlates extremely well to the number of wealthy Chinese citizens, so it can be a way to invest in China without having to deal with the typical rule-of-law issues associated with mainland Chinese investments (though forgery risk does exist).
7. Stringed Instruments.
Want to buy shares of Yo-Yo Ma’s cello? In 08′-09′ a fund launched to buy stakes in rare, expensive violins (such as Stradivarius). Eventually they expanded to other high-end stringed instruments. The fund allowed musicians to extract some liquidity from their instrument by selling percentage ownership. The better the musician, the better the instrument tends to appreciate.
6. Wine. Wine gets more valuable with age, an attractive feature that is not lost on funds focused on wine investing. There are several fully developed wine exchanges where investors with a knowledge of the market can buy brand-names that are likely to appreciate more favorably over time: see Liv-Ex Wine Exchange. Another positive for investors is that the funds often buy wine wholesale and can sell bottles at cost to investors. (As Biggie Smalls would say: ‘don’t smoke your stash’, but in this case, it seems to work out alright.)
5. Single Malt Scotch.
A fund recently launched which focuses specifically on scotch. Along the same lines as wine, single malt scotch tends to increase in value over time. The fund’s thesis also mentions that 18 years ago, distilleries did not predict the massive growth in Asian demand for spirits and therefore under-produced. As new markets like China and India grow rapidly, demand for the limited quantity of aged, high quality scotch creates additional upward price pressures.
4. Fraud Activism. Several hedge funds specialize in finding and exposing fraudulent companies. A few funds made names for themselves by exposing and shorting dozens of fraudulent Chinese securities over the past decade. The funds would send investigators to the foreign factories and interview customers, suppliers, and local regulators. Once they confirmed the frauds, the funds would release their findings and stock in the phony companies would soon collapse.
3. Gambling. This is artfully referred to as “advantage gaming”. Poker is one of the only games at the casino where skill can give players an edge. Blackjack also used to be a profitable game until those pesky casinos decided to introduce 8-deck tables and tighter security.
Any skill game played by a skillful player has the benefits of (a) having a positive expectancy and (b) being completely uncorrelated to the market. Your pocket aces don’t care whether China slashed GDP forecasts. Many players and former players stake their friends, and at times, opportunities have opened up for investors in this world as well.
2. Winning Lottery Tickets. Lottery winners are given the choice of taking a lump sum payment or receiving regular payments over 20 or 30 years. Most choose to take the lump sum, but the annuity is almost always worth more (coming from a financial present value perspective.) A 20 year lottery annuity is basically equivalent to a 20-year state-issued bond, for which there is already a highly developed market. It’s unclear whether this is still an active trade, but some funds were known to actually pay the winner a slightly higher lump sum, and either hold or re-sell the bond into the market for an arbitrage profit.
1. Fun informational advantages.
A. One fund manager who focused on restaurants and retail outlets would order a single muffin every week from a restaurant just so he could see the invoice number. He’d use this intel to approximate sales volume.
B. A tech manager realized that Taiwanese semi-conductors have to report their sales monthly, as opposed to U.S. companies that report quarterly. He would look to the monthly Taiwanese sales as a leading indicator for the tech market in the U.S.
C. Commodities funds will often have sources at major ports around the world to count ships and get a sense of the movements of major commodities in order to trade on that supply/demand information.
Finance is a dynamic field. Managers are always looking for little tricks to gain an edge, and are constantly pushing the frontier to find interesting new strategies.
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