Diversification, a Euphemism for Crappy Investment Option

by Johnny Debacle

I have read two articles today, which is my daily limit.

Linked from Going Private was this article on hedge fund and private equity shops investing in big budget movies. The second article I found while Googling a rationale for the existence of the catastophe bond .

The articles contained these excerpts respectively. 1st excerpt:

For its part, companies such as Virtual see Hollywood as a potentially lucrative place to diversify investment portfolios. And Virtual is pursing that strategy in a significant way, investing in Leonardo DiCaprio’s “Blood Diamond,” Brad Pitt’s “The Assassination of Jesse James,” and George Clooney’s “The Good German.”

……

As a result, Virtual covered about $125 million, or half of the $250 million it should cost to make and market “Poseidon” around the world. At the current rate of ticket sales, Virtual could end up with $75 million or so from “Poseidon” — meaning it could lose more than $50 million on the movie, said two people familiar with the film’s finances. A Stark executive disputed that worst-case scenario and also said its Hollywood investments should not be judged on the domestic box office of one movie.

2nd excerpt:

Advantages of [catastrophe] bonds are that they are not closely linked with the stock market or economic conditions and offer significant attractions to investors. For example, for the same level of risk, investors can usually obtain a higher yield with CAT bonds relative to alternative investments. Another benefit is that the insurance risk securitization of CATs shows no correlation with equities or corporate bonds, meaning they’d provide a good diversification of risks.

I can provide some other investments that would provide attractive diversification for these companies — the roulette wheel. Some secondary thoughts: If you have a proprietary algorithm that picks Poseidon as a likely hit, it’s time to get a a new algorithm. Libor+230 is an insanely low risk premium for the chance of losing all your money if Mexico has an Earthquake in the next three years; to compare the market pricing for secured near investment grade debt is L+220. If a Mexican offered me that deal, I’d build a fence around him on the spot.



Ad Sense Ad Sense

Comments

  1. v
    May 16th, 2006 | 3:21 pm

    as someone who has worked in the TV/Film industry* for the last ten year I find this completly amusing. Those of us on the inside know what a complete and total crap shoot it is finding the next big hit and what the public can be duped into buying.

    I cannot believe that so called finacial professional or hedge fund would “invest” in a feature film. Esp one that looks as bas as Posiedon.

    disclaimer: I am a behind the scenese techie, i have nothing to do with finance or business what so ever. Either in the film industry or otherwise. I read finacial blogs for entertainmet since I have become too jaded to anything on the big or small screen. 🙁

  2. June 8th, 2006 | 3:39 pm

    Whats so funny about catastophe bonds is that they completely violate the core concept of fixed income investing. I.e don’t lose principal.

    It’s utterly silly to take L+230 when the risk of good earthquake (and losing all your cash) is probably L+110 per year. (Note that the risk of earthquakes is correlated to how expensive it would be clean up after one)