One year ago, I engaged a financial adviser. We had a review of my portfolio this week. The portfolio has done well. I made about 8% over one year, which is very good, considering how disastrous the year 2011 has generally been, for stock markets around the world.
This performance has been possible, because a good part of my portfolio was not in the traditional sort of equity funds. In fact, a good part of the portfolio was not in equities at all. The advantage of being an accredited investor is that I get to invest in more esoteric instruments that may not be accessible for ordinary retail investors.
Of course, this doesn't mean that esoteric instruments always make money. They can lose money too. However, they do significantly broaden your diversification options.
My financial advisor is now recommending that I consider a life settlement fund. I already know about these. I've never invested in these before, but I've read about them. In principle, they make sense to me. However, they have been the subject of some controversy in the US (which is also the only major market for such investments). How do they work?
A life settlement fund invests in life insurance policies. Where do they get these policies? They buy them from the policyholders. Who are these policyholders? Typically, they are people with a low life expectancy. They could be very old, or they could be suffering from some terminal illness such as AIDS or cancer.
So let's say you have a life insurance policy that promises to pay $1,000,000 when you die. And you happen to be very ill. You can't get the money while you're alive. And the money will be useless to you, when you die. You would rather have the money now, which you can immediately use either for your medical treatment, or just to enjoy what's left of your life.
In that case, the life settlement fund could buy the policy from you for, say, $800,000 (I have no idea what the typical pricing is like - I'm just using the $800,000 figure as an example). You get $800,000, to spend as you please. Two years later, you die.
The life settlement fund then gets to collect $1,000,000 from the insurance company. So essentially, over a two-year period, the life settlement fund has made a $200,000 profit, out of its $800,000 investment (less the premiums that the fund paid over that period).
This is the kind of investment that a life settlement fund makes. Of course, it does not just invest in one or two policies. Instead it invests in large numbers of life policies.
It's rather morbid. The faster these people die, the more money the life settlement fund makes. Conversely, the longer these people live (and who knows, a few people may even manage to recover from their supposedly terminal illness), the less profitable the fund will be. A "good" investment is someone who is very ill, has high chances of dying soon and owns a policy with a large payout.
For the investor, what are the advantages of investing in a life settlement fund? Well, it is excellent for diversification purposes. There is very little correlation to equity markets, or bond markets, or commodities, or other more-traditional classes of financial investments. Thus your investment could continue generating good returns, even if stock markets collapse badly.
The way they did, this year.