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For decades, novice and experienced investors alike have been told to run away – quickly – from any opportunity whose returns come with the “g-word”: guaranteed. It has always been accepted thinking, as the market is notoriously difficult to predict. However, Paul Regan, a hedge fund manager and founder of Next Level Holdings LLC, asked himself one question: what if “guaranteed” didn’t have to mean “scam”? “I decided to use my experience in the market to figure out a way to truly guarantee returns to investors,” he says. “What it came down to was designing a twofold strategy: engineering an arbitrage-based, fixed-income product that consistently generates a 24% annual return and partnering with top insurers, including Lloyds of London, to back each investment.”
Regan has been a financial engineer for over twenty years and has spent his time as a trader studying alternative investments in non-traditional markets and analyzing trends in those markets.
“What I saw over time was that there were indeed scalable and sustainable models that could be implemented in several niche markets, specifically in the physical commodities markets, where risk could not be eliminated but could be measured and minimized to specific levels,” Regan recalls. “As a result, why couldn’t I get insurers to underwrite away that risk, especially if it was more measurable than the risk associated with car, life, health or home insurance, let’s say? Why couldn’t I get the same actuaries to calculate the risk and offer a reasonable, one-time premium in exchange for that risk? If I could, then delivering a guaranteed return was no longer impossible.”
Regan states that risk will always be a part of investments. He believed, however, that by thinking differently, he could create a new investment strategy that would smash the old school of thought. By marrying specific trade, finance, and arbitrage-based strategies with dedicated insurance policies, which would protect investors’ principal and interest, he could create a whole industry which would fill a need in a marketplace desperate for healthy yield without any risk.
Insurance seemed like the right approach, as the investor’s capital would be protected. Insurance companies, however, were going to be a hard sell, as Regan knew. They are awash in regulations and red tape, not without reason.
“To get their buy-in, I was going to need a unique strategy that they would be comfortable backing with their own products,” Regan explains. “I focused on my specialty: arbitrage investing and trade finance programs.”
In arbitrage, traders take advantage of price discrepancies between the same investments in different markets. They buy in one market while simultaneously selling an equivalent size in a different but related market, ultimately taking advantage of price divergences between the two. This is possible because global markets do not operate with complete efficiency. Information in one part of the world may not travel as quickly as it does elsewhere, leading to different share prices.
For years, Regan had been an arbitrage trader and had become adept at generating returns. He knew how to buy shares at a lower price and then sell them in the second market at a higher price, securing a quick profit.
“I was already seeing 9-12% returns by turning over my capital 3-4 times every 30 days,” he states. “By increasing our monthly transaction volume, we could generate returns of around 80% per annum after expenses. About one-third of that, or around 24%, would go straight back to investors in our fund.”
All Regan had to do was convince the insurance companies to insure his investment products. “Not easy!” he laughs. “It took nearly two years of forensic audits and being put under massive amounts of scrutiny before they came on board. I also needed to put up eight figures in counter-guarantees to further satisfy our insurers. But, when the dust settled, we had dedicated policies being issued to our investors that guarantee them against loss of principal or interest and that come directly from licensed and regulated major insurance carriers, all of whom carry investment-grade ratings from AM Best, the credit rating issuer for insurance carriers.”
When asked why he thinks other investment professionals have remained resistant to the idea of guaranteed returns, Regan is thoughtful.
“The market is what it is: volatile. Look at its history, with the ups and downs, crashes and booms. Some element of that will always remain,” he says. “And, let’s face it, there have been more than a few fraudsters out there who have shouted guaranteed returns and then ripped off their clients. So, caution is definitely warranted. Ultimately, only insurance companies can issue guarantees, so let’s face it; while I am not minimizing my own accomplishments, I have to believe you will see more structured products paired with insurance policies in the future. It just makes sense, and while I was perhaps the first, I’m certain I won’t be the last!”
He believes that it is vital that investment professionals be willing to challenge every preconceived idea about investing. “We can – and should – learn from those who came before us, and the history of the stock market can teach us principles that will likely never change,” Regan concedes. “What I do is possible because I work within a very specialized sector, and certain prerequisite criteria are necessary in order for our models to be commercially viable. It’s not a huge opportunity as a result, and you could call it a micro opportunity. Even so, if that ‘micro’ opportunity is a few hundred million in size, then in my view, it is big enough to enter that space and build out our trades and get our insurance wrappers in place for our risk-averse clients and then sit back and enjoy.”
Regan says that he is seeing that it is possible to generate consistent, market-beating returns in all market conditions. “We no longer have to time or price the market correctly in order to be profitable. We can now provide certain returns in an uncertain world, and that means it is a new day for all investors.”
