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A Hedge Fund Gambles on Death

The market for exotic securities hasn’t entirely gone away. It’s just gone underground—-six feet under, to be precise.

Hedge fund Davidson Kempner Capital Management is plunging into life settlements—a market in which speculators buy-up unwanted life insurance policies from wealthy individuals looking to score some quick cash. The $10 billion New York-based fund is planning on selling so-called “death bonds” to overseas investors, as part of a plan to potentially raise cash to finance its life settlements acquisition business.

In January, DK Life Settlements Acquisition Ltd, a foreign company with ties to Davidson, filed an offering statement with Irish regulatory authorities to sell up to $1 billion in “participating notes.’’ The terms of the offering weren’t made public, but the notes are due on Dec. 1, 2058. The long payout on the bonds is leading to speculation that the bonds will be backed, in part, by the death benefits the hedge fund collects on the life insurance policies it acquires—hence the name death bonds.

Davidson declined to comment on the deal. The hedge fund has been making headlines of late over its successful campaign to oust most of the directors of Sun-Times Media Group, the Chicago-based publisher of the Sun-Times and dozens of other newspapers.

But people familiar with the life settlements offering say the total dollar value of any bonds sold will be far smaller than $1 billion, since the fund’s life settlements portfolio is significantly less than that sum. The $1 billion figure is really marketing bravado more than anything else. In a shelf offering, there’s nothing to stop an issuer from shooting for the moon.

Some of the proceeds from the offering will no doubt fund the operations of Proverian Capital, a so-called life settlement provider that negotiates with brokers and individuals to acquire unwanted policies. Davidson is Proverian’s majority shareholder. Speculators like Davidson buy policies at a substantial discount to their death benefit and keep paying the premiums—betting the seller will die before the policy terminates

The hedge fund’s foray into life settlements comes at a time that some Wall Street players—like Deutsche Bank—are scaling back their ambitions. Still, Davidson’s linking up with the Grim Reaper is a indication that it’s far too soon to bury this most macabre of investments.

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