Longing to have a super-genius, wildly successful hedge fund manager invest your money? Yeah, me too. But unless you are an institutional investor, sold your Internet company at the top of the last tech bubble, or happen to be said fund manager, your odds have historically been low.
Surprisingly, within the insurance industry -- one of Warren Buffett's favorite industries – there hides a way to have a hedge fund manager invest your money without having sold your company for millions.
How do insurance companies "float" to the top?
Buffett and his holdings company Berkshire Hathaway
Float is invested into securities to earn a yield while it waits for future payouts. The way the float is invested depends on the types of events it is insuring against and the expected duration. Some insurers, such as Aflac
Hedge Fund manager David Einhorn saw this opportunity and founded a re-insurer, Greenlight RE
How you can invest with Einhorn
Einhorn set up Greenlight RE in a way so that the float is invested into his hedge fund. This has had the benefit of adding additional capital to his fund and at the same time compounding the float of the insurance company at a high rate.
Greenlight RE is publicly traded on the Nasdaq exchange. Greenlight RE had a net profit margin of 23% last year, and currently trades at a reasonable 16 times P/E and a low 1.3 price-to-book value ratio. The stock is unfortunately not a pure play investment into Einhorn's hedge fund, since it operates as a standalone business and has operating costs to pay, but a significant component of the returns come from the float that is invested into Einhorn's hedge fund.
Since the earnings from the float stay in Greenlight RE -- which is a Cayman Islands-based company -- they are not taxed as earnings. This tax benefit adds up over time and allows you to take the regular gains from Einhorn's hedge fund untaxed until you sell your position in Greenlight RE.
So what exactly is re-insurance?
If you're intrigued by a chance to invest with Einhorn, but are leery on re-insurance, here's how it works: Re-insurance is insurance that is sold to insurance companies. The insurance companies will buy insurance on their own underwriting to help accommodate risk, smooth their income, or take advantage of an arbitrage opportunity (buy insurance at a cheaper rate than they sell the insurance to their customers).
Greenlight's not without its risks, but for everyday investors intrigued by David Einhorn's track record, it could be your best way to invest in a hedge fund without being a millionaire.
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