FM round-up: Life and death arbitrage

According to one fund of hedge funds manager, the new craze in strategies is buying life insurance policies. Managers are approaching elderly people and offering to buy their policies from them at a discount. “For example, managers would offer $500,000 to a 75-year-old for their $1 million life policy,” says the manager. “It seems a bit unsavoury, as managers are basically counting on a quick death so they don’t have to pay the annual premiums for a prolonged period of time. But as long as the discount isn’t too high, it seems there is little wrong with the strategy. The elderly person gets a lump sum of money, and the hedge fund manager has a tidy return,” he says. Managers are said to hold portfolios of numerous elderly people with varying life expectancies to spread risk. “The only problem with the strategy is that there is a finite number of people about to die who want to cash out of their life insurance policies.”