Hedge Funds and Tax Links: The Future Correlation

Investors today are facing the toughest economy in decades and low hedge fund returns as a result. So how are yesterday’s returns supposed to be earned in today’s economy? What will be the next big source of investment income? These are the questions that the best professionals ask. However, the answer may be right under your nose.

For one hundred and fifty years, the counties and townships of this country have been in the business of selling tax liens, which provide high returns for interested and knowledgeable investors. This type of investment fits very well with multi-strategy hedge funds, as well as with those focused on the credit and real estate market.

Understand the process:

However, before investors can dive into this slightly unique market, they need to understand the concepts behind it. One of these is the tax lien receivable, which is simply the right to collect taxes on a property. The reason this term is so important to this market is because once a homeowner falls behind on property taxes, after a while, the bank has the right to take a lien on the property and sell that lien. . The buyer can collect back taxes from the property owner.

Because much of a government’s ability to allocate funds depends on the collection of property taxes, failure to pay by individuals is highly damaging. Therefore, governments must look for quick solutions to alleviate the loss of income. If not, they must cut spending or raise property taxes for those who continually meet their obligations. It is therefore not surprising that many governments seize the opportunity to sell debt, which is secured by the property itself.

So why is this a “good buy” for the investor? As always, the answer is interest earnings. As the property owner pays off the past due debt, he must also pay a penalty in the form of interest. That interest can range between ten and fifty percent. That means a tremendous profit for the bondholder. Even if the property owner does not pay, in most cases, after a set period of time, the lien holder can foreclose on the home and arrange for a sale. Purchased at the correct price, this can also represent a tremendous income for the investor.

The fall:

At this point, the fiscal link market suffers a major drawback. That is the lack of a secondary market or uniform process for reselling outstanding links. For now, liens are sold only once and the buyer assumes the responsibility to collect the overdue debt or continue with the foreclosure process. However, if a secondary market were to develop, it could become a real source of investment and would be viewed by more as a type of hedge fund. They could, if they did it right, buy low and sell high and reap the rewards more quickly without having to worry about the hassle of collecting taxes due.

This is not to say that they don’t offer a high yield opportunity out of the box, just that they are not currently ideal for hedge fund type investments.

Risk versus reward:

Regardless of whether or not they operate as a hedge fund at this time, tax lien investors speak highly of this type of investment. An investor in this market can expect an average return of around ten percent on payout and the average bond purchase will see a return of fifty percent in the first year. Not risk-free, as there is no set expiration date and foreclosure can be a lengthy undertaking, they are still considered a favorable source of investment for many seeking lower risk and moderate returns.

Who should make the investment?

Notwithstanding the above, included in the list of those typically looking for these types of investments, such as corporations and regional levy groups, are hedge funds and private equity firms. They are ideal for those who are not looking for easy liquidity and for those who have adequate support from an expert legal team.