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.

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