News media reports on hedge funds tend to focus on spectaculars losses/gains and eccentric behavior of investment managers and clients, there is a certain interest on learning how these financial entities work. As with many other trading activities, speculation fuels the hedge fund industry. Here are the top 10 intriguing methods used by some hedge funds to drive profits; some of the methods mentioned below are not for faint-hearted investors or fund managers, but they are certainly worth a look:
3 – Classic. Purchasing Troubled Government Debt: Conventional wisdom teach us that sovereign bonds will always pay; alas, we must consider the European debt crisis. Loading up on non-performing government bonds can generate handsome future profits, specially if the issuer experiences a windfall such as the discovery of oil reserves.
4 – Weird. Life Insurance Settlements: Purchasing policies that belongs to others in the hopes that they pass away before expected.
5 – Skewness. Disaster Bonds: Insurance companies that offer policies in regions that are prone to natural disasters such as hurricanes may offer very lucrative bonds that will consistently pay as long as there are no earthquakes, hurricanes, etc.
6 – Stylish. Fine Art: Hedge fund managers who have knowledge of the art world may seek to acquire masterpieces that consistently appreciate as time goes by. There’s also the fact that a Picasso that goes on an exhibition tour generates tickets from art gallery and museum ticket sales. And you can enjoy it in your living room.
7 – Hangover. Wine Investing: Similar to art, some wine tends to appreciate greatly in value with age. Purchasing a harvest now may yield great profits in the future, and some investors happen to be great aficionados in this regard. In terms of being nice to clients, fund managers can purchase wine bottles and later gift them to clients as their retail price increases.
8 – Satellite. Counting Ship and Truck Traffic: This is not so unusual. Commodity traders can get supply and demand intelligence by keeping an eye on the number of ships, trucks and railroad cars transporting raw materials, consumer goods, etc. This forms the basis of a trade and lessens speculation.
9 – Hard Cash. Philatelic and Numismatic Investments: Currency and stamp collectors can make a pretty penny, so to speak; why not fund managers? Limited postal stamp editions bearing the image of Pope Francis today may yield a fortune in the future.
10 – Funny. Purchasing Winning Lottery Tickets: Most lottery systems offer winners the option of receiving a lump sum that is considerably lower than the jackpot or signing up for an annuity. By offering a slightly higher lump sum amount in exchange for a winning ticket, hedge fund managers are effectively purchasing a high-performance, albeit non-inflation adjustable, government bond. Obvious, just buy the winning ticket.