September 24, 2007 | 1 Comment
Cliché alert! The only certain things in life are death and taxes. I have to disagree to some extent with the taxes part until we get a verdict on how my carried interest is getting taxed. The death part on the other hand seems more certain these days within the hedge fund ranks. Without naming names, it seems the mortality rate amongst hedge fund managers has been on the rise lately. Possibly correlated with the fact that there are simply more hedge fund managers, but also certainly due to other factors.
Now in a couple of high profile cases, death was the result of participation in recreational activities (e.g., snowmobiling, motorcycle riding, etc.). In these instances, it’s hard to fault the deceased for having fun and living life to its fullest.
Heart attacks, on the other hand, should make us step back and wonder if maybe our managers are too serious, too stressed, and not taking the best care of themselves. Now don’t get me wrong, I want my managers focused, but I also want them to live long, happy, and healthy lives. Please folks, make time for friends, family, exercise, and recreation and eat a more healthy diet.
Since we’re on the topic of death, let’s talk mortality trades. That’s right, long and short mortality. How is this accomplished? Life insurance related investment strategies. There are a number of ways to play this trade.
Long mortality (i.e., your return is greater the shorter the life span of the insured): here investors can buy another person’s life insurance policy in the open market, pay the premiums, and collect the benefit when the insured dies. The policy will generally trade on a discounted basis with the primary factor being the expected life of the insured. With that said, the shorter the life span, the quicker the pay off and the greater the return.
Another related long mortality strategy is to make a loan to an insured at a high rate (often 10%+ per annum) with the loan collateralized by the life insurance policy. Here you have a couple of paths: 1) the borrower makes their payments and you receive the interest; 2) The borrower defaults, you now own the policy and sell it in the open market, hopefully at a premium to the outstanding loan value; or 3) the borrower defaults, you now own the policy, and you hold the policy (and pay the premiums) awaiting the insured’s death for your payoff.
Short mortality trades, on the other hand, bet on the life extension of the insured or group of insured’s. A typical strategy here is selling extreme mortality protection. This strategy is basically re-insurance or taking some of the risk off of the books of the life insurers. Here, you are collecting a nice annual premium from the insurers (generally 10 %+), but are at risk if mortality in a certain pool exceeds set parameters. A large amount of deaths from natural disasters or disease outbreaks are really your risk here. These trades are generally private and bespoke allowing the investor to structure the pool of insured’s’ and the triggers.
A much more feel good strategy as you’re cheering for life, right?
Seems like some pretty sick and twisted shit, eh? Well, it’s out there and it’s a multi billion dollar segment of the investment universe where a lot of reputable hedge funds are playing and the insured are willingly selling their policies or borrowing against them (this is a far cry from the sleazy viatical game that occurred years ago). Most related strategies are on the lower end of the liquidity spectrum, but the non-correlated nature of the trade, along with healthy (pardon the pun) returns, makes the opportunity set attractive.
August 31, 2007 | Leave a Comment
There is a lot going on today with the subprime situation, etc. So, for the sake of brevity, here are some of the more compelling headlines today …
And for a bit of fun, our friends at Fintag have some scoop on the Wall Street sequel, Money Never Sleeps
Gekko is back – as a hedge fund manager.
August 30, 2007 | Leave a Comment
Dealbook reports on a couple of new studies that whine about hedge fund manager salaries being out of whack with the rest of the workers in the United States:
HFL says: Notice how these “advocacy” groups like to single out the top 20 hedge funds. What about the other 8500 hedge funds out there? Guess they don’t count.
HFL says: Let me clarify this for you … The Institute of Policy Studies and United for a Fair Economy are nothing more than socialist front groups determined to destroy the capitalist system. Groups like this like to hide behind euphamisms. It is always about promoting “fairness” and “preventing the corruption of democracy.” But really its about taking your liberty and controlling how successful you can be. No wonder they are out to get hedgies.
HFL says: Horror, the horror. None of these nitwits can make over $35K per year. No wonder their pissed off. They want diamonds like Percy Walker has — Oh, but that would mean having to go out and earn it! Nevermind.
HFL says: Of course she does … because she’s a socialist.
July 27, 2007 | Leave a Comment
Dealbook reports today that Schumer’s opposition to a tax hike on hedge funds and private equity firms is likely a double edged sword …
Oh, I get it: Divide, conquer and then blame the oil & gas industry for killing the tax idea. One more thing to blame on those pesky oil companies.Charles Schumer, Chuck Schumer, hedge funds, private equity, tax, taxes
July 20, 2007 | Leave a Comment
We are not the only ones not happy about Washington’s desire to raise taxes on hedge funds and private equity firms. Don Luskin of Smart Money included this sneak peek of his new piece on his blog today. As he points out, hedge fund managers are viewed as being rich — and therefore guilty of not paying enough taxes:
Well put.hedge funds, private equity, raising taxes, taxes
July 16, 2007 | Leave a Comment
After taking some more time to mull over the tax hike proposal on private equity firms that go public, Senator Hillary Clinton has decided to join the crowd. The NY Sun reported over the weekend that Senator Clinton is for a tax policy that eliminates the ability of private equity and hedge funds to pay 15% on income and replacing it with the corporate tax of 35%. Given the headlines made by Blackstone Group recently, this debate is not unexpected, especially in an election year. As with most politicians, its not the substance of the debate that I find bothersome, but the ridiculous comparisons that always seem to pop up …
The same old tired comparisons between teachers and business people. I wonder where Senator Schumer stands on all of this?hedge funds, hillary clinton, private equity, taxes
July 10, 2007 | Leave a Comment
A few weeks ago, the story surfaced that Senators Schumer and Clinton are undecided about whether to raise taxes on hedge funds and private equity firms that go public. According to the story I read in the New York Sun, “The bipartisan proposal, offered last week by the leaders of the Senate Finance Committee, could be prickly for the New York senators, who have pushed for increased fairness in the tax code while also advocating for growth in the financial sector, which has long been crucial to the state’s economy.”
It is interesting that this is a bipartisan proposal. I guess the Republican senators on the committee like the idea of raising taxes too, as much as their Democratic colleagues. And when politicians mention fairness in conjunction with the word taxes, it generally makes me uneasy.
Evidently, the trigger for this new initiative was a result of the public attention around the public offering by the Blackstone Group — a huge New York based private equity firm. The proposed legislation would treat all publicly traded partnerships such as Blackstone as corporations instead. This means such firms would be subject to a tax rate of 35% on income as opposed to privately held partnerships which do not usually pay a corporate income tax. The income “passes through” to the investors who pay whatever rate applies (often the 15% rate on capital gains).
According to the story, Senator Clinton has not yet made up her mind about the bill stating that there are ” … broad concerns surrounding private equity in relation to the rest of the market that need to be examined ….” Really? What exactly are these broad concerns? The Senator’s spokesperson did not say. Yet, we do know that ending certain tax breaks for corporations is a big (and expected) plank in the economic platform of her presidential campaign.
And Chuck Schumer? He would only state that he was giving the bill a review but would not comment much more than that. But in my estimation, Senator Schumer will likely back this bill if for no other reason that he is a self declared socialist.
Yet since “the bill’s authors have cast the proposal as an effort to clarify the tax law that gives what they say is an unfair advantage to companies that seek to avoid higher rates by making public offerings as partnerships. ”… [The bill] … would apply to firms that derive their income from investment adviser or asset management services.” In other words, this bill will penalize successful investment firms in an effort to curtail the capitalistic forces that propel their prosperity. Nice.
The article continues by explaining that the ”push for higher taxes has come amid reports detailing the wealth enjoyed by managers in the growing private equity firm and hedge fund sector — perhaps none more so than the co-founder of Blackstone, Stephen Schwarzman, whose stake could be worth as much as $7.5 billion.” Yup, its a crime to be rich and successful in the USA — at least according to some politicians.
I don’t know for sure if Senator’s Schumer and Clinton will back this bill, but as I stated earlier, I would bet on it. So, all of you start up hedge fund managers, as you become successful, keep an eye on Uncle Sam as he will most likely be looking for a larger share of your hard earned profits.hedge funds, private equity, taxes