SuperCash The New Hedge Fund Capitalism JAMES ALTUCHER John Wiley & Sons, Inc. ffirs.qxd 1/24/06 1:34 PM Page iii ffirs.qxd 1/24/06 1:34 PM Page iii SuperCash ffirs.qxd 1/24/06 1:34 PM Page i Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our web site at www.Wiley Finance.com. ffirs.qxd 1/24/06 1:34 PM Page ii SuperCash The New Hedge Fund Capitalism JAMES ALTUCHER John Wiley & Sons, Inc. ffirs.qxd 1/24/06 1:34 PM Page iii Copyright © 2006 by James Altucher. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. 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Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Altucher, James. SuperCash : the new hedge fund capitalism / by James Altucher. p. cm. — (Wiley trading series) Includes index. ISBN-13 978-0-471-74599-0 (cloth) ISBN-10 0-471-74599-5 (cloth) 1. Hedge funds. I. Title: SuperCash. II. Title. III. Series. HG4530.A526 2006 332.64'524—dc22 2005034032 Printed in the United States of America. 10987654321 ffirs.qxd 1/24/06 1:34 PM Page iv Dedicated to my mom, Rita Altucher, for being my hero ffirs.qxd 1/24/06 1:34 PM Page v ffirs.qxd 1/24/06 1:34 PM Page vi vii Contents Introduction: What Is SuperCash? 1 CHAPTER 1 Hedge Funds Are the New Banks 9 Subprime Auto Finance 10 Trade Factoring 11 Hard-Money Real Estate Lending 11 Life Insurance Premium Financing 14 Tax Liens 16 Taxi Medallions 18 CHAPTER 2 Activism 21 CHAPTER 3 Buying Delinquent Credit Card Debt 47 CHAPTER 4 Everything You Wanted to Know about PIPEs But Were Afraid to Ask 55 Regulation S 57 Death Spirals 58 Deal Types 59 Common Stock 60 Convertible Debentures 61 PIPE Performance 65 CHAPTER 5 The New New IPO 71 Specialty Acquisition Corporations 72 The Dutch Experiment Is Over 75 The Rise of the Reverse Merger 76 ftoc.qxd 1/24/06 1:34 PM Page vii CHAPTER 6 Trade like a Billionaire 79 Mark Cuban 80 Bill Gates 81 Michael Dell 81 Bruce Kovner 82 Peter Lynch 84 George Soros 87 Peter Kellog 87 Carl Icahn 87 CHAPTER 7 Closed-End Fund Arbitrage 91 Discounting Mechanisms 92 Do-It-Yourself Closed-End Fund Arbitrage 93 CHAPTER 8 Short-Selling 99 Pitfalls of Short-Selling 101 When Short-Selling Works 105 CHAPTER 9 The Finer Things in Life 111 Don’t Spend All Your Rare Coins in One Place 112 But Can I Afford a $100 Million Painting? 114 Whatever Happened to the Bowie Bonds? 117 Appendix: The 12-Piece United States Gold Coin Type Set 119 CHAPTER 10 Trend versus Countertrend 131 QQQQ Crash Revised 135 The Christmas System 138 Fading Unemployment 141 CHAPTER 11 The Myth of the Index, or ETFs: Active or Passive? 143 Whatever Happened to the Original Dow Jones? 149 viii CONTENTS ftoc.qxd 1/24/06 1:34 PM Page viii [...]... led to new profit opportunities for investors while indirectly allowing more people to afford life insurance TAX LIENS While hedge funds can often be considered the new banks” due to their ability to take financing risks where banks are either unwilling or unable ccc _altucher_ ch01_ 9-2 0.qxd 1/19/06 12:47 PM Hedge Funds Are the New Banks Page 17 17 to, hedge funds can also take on the role of the new tax... the insured party decides to keep their life insurance policy they would have to pay back the loan plus interest Should the insured elect not to keep the life insurance policy they can relinquish the policy to the fund instead of paying the interest payments If the insured dies during the loan period, then the loan is likely to be paid back from the death benefit and the insured’s estate will owe a prepayment... The sole reason that we make loans of this nature and banks don’t is that the banks’ criteria are based upon the borrower’s ability to demonstrate that they can service the debt Although banks require an appraisal and a deed of trust, the actual property is in- ccc _altucher_ ch01_ 9-2 0.qxd 1/19/06 12:47 PM Page 13 Hedge Funds Are the New Banks consequential to the loan approval process They look at the. .. the maximum they would lend would be $670,000 Why wouldn’t banks do this lending? A couple of reasons: • Banks tend to focus on the individual They want long-term, creditworthy customers They don’t care as much about the assets because they do not view themselves as being in the business of foreclosing and having to liquidate those assets • These hard-money loans tend to be short-term, one- or two-year... lending, PIPEs, closed-end fund arbitrage, new types of IPOs, and even securitizing the cash flows from elevator music In the following chapters, I will show you how savvy traders and hedge fund managers are turning cash into supercash in today’s tough markets We’ll look at the following topics and strategies for supersizing returns: • Hedge funds as the new banks Hedge funds are feasting on the scraps from... classes ccc _altucher_ ch01_ 9-2 0.qxd 1/19/06 12:47 PM Hedge Funds Are the New Banks Page 15 15 However, as with any investment, there are certain risks, which include liquidity in the secondary marketplace, changes in the regulatory environment, and increased life expectancies Several hedge funds have started up in this area, on the basic idea that the fund will lend to senior citizens 65 or older the premiums... their place Trading strategies obey the same laws that particles do in quantum physics: When you observe them (i.e., index a hedge fund strategy) they change By definition, funds are alternatives To institutionalize them is to damage them The reality is, for fund of funds managers (I’m one of them) looking to diversify into a group of uncorrelated hedge fund strategies, the traditional strategies of merger... With market-neutral strategies I’m getting half the return at twice the risk The market-neutral, trading-oriented hedge funds that have typically been uncorrelated with all other assets are now correlated with a flat line or worse due to the enormous amount of inflows combined with the lack of volatility in the market However, with the overall decline in interest rates since the late 1990s, the risk aversion... on the laws of the state or the city where the tax is supposed to be paid Part of the reason for this is that although the tax is usually a small percentage of the overall value of the property, there is no way to value the creditworthiness of the people who owe the debt to the government Everybody who owns a property must pay a tax, regardless of creditworthiness • It is usually the senior debt on the. .. the lien is as high as 10 percent of the property value, that’s still a steep drop (over 90 percent) that the value of the house would have to fall before affecting the value of the lien Consequently, hedge funds are quickly entering the arena and making the purchase of tax liens competitive MD Sass, a New York–based family of hedge funds that has a primary focus in asset-backed securities, has a hedge . Cataloging-in-Publication Data: Altucher, James. SuperCash : the new hedge fund capitalism / by James Altucher. p. cm. — (Wiley trading series) Includes index. ISBN-13 97 8-0 -4 7 1-7 459 9-0 (cloth) ISBN-10. Closed-End Fund Arbitrage 91 Discounting Mechanisms 92 Do-It-Yourself Closed-End Fund Arbitrage 93 CHAPTER 8 Short-Selling 99 Pitfalls of Short-Selling 101 When Short-Selling Works 105 CHAPTER 9 The. step further by examining all of the new types of investments that have been developed over the past few years by the top hedge funds and investors in the world, including asset-backed lend- ing,