Hedge Funds and Tax Liens: The Future Correlation

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Today's investors face the most difficult economy of recent decades and, consequently, the low returns of hedge funds. So how is it supposed to do yesterday's returns in today's economy? What will be the next major source of investment income? These are the questions that the best practitioners ask themselves. However, the answer may be right under their noses.

For one hundred and fifty years, counties and municipalities in this country have devoted themselves to the sale of tax concessions, which provide high returns to interested and knowledgeable investors. This type of investment fits very well with multi-strategy hedge funds as well as those focused on the credit and real estate markets.

Understand the process:

However, before they can dive into this slightly unique market, investors need to understand the concepts behind it. One of them is the tax lien receivable, which is simply the right to collect taxes on a property. The reason why this term is so important for this market is that once a homeowner fails to pay property taxes, after a while, the bank has the right to place a lien on the property and sell that lien. The buyer is then able to collect the tax arrears from the owner.

Because a large part of a government's ability to allocate funds depends on the collection of property taxes, non-payment by individuals is very detrimental. Thus, governments must seek quick solutions to mitigate the loss of income. Otherwise, they must cut spending or raise property taxes for those who continually meet their obligations. It is therefore not surprising that many governments take the opportunity to sell the debt, which involves a guarantee of the property itself.

So why is this "a good buy" for the investor? As always, the answer is interest income. As the property owner pays off the overdue debt, he must also pay a penalty in the form of interest. This interest can range from ten to fifty percent. This represents a huge gain for the holder of the lien. Even if the owner does not pay, in most cases after a certain time, the lien holder can foreclose on the house and arrange a sale. Purchased at the right price, it can also represent huge income for the investor.

The fall:

At this point, the tax lien market suffers from a major drawback. It is the absence of a secondary market or a uniform process for the resale of outstanding liens. For the time being, liens are sold only once and the buyer assumes responsibility for collecting the debt owed or monitoring the foreclosure process. However, if a secondary market were developed, it could become a real source of investment and more would consider it as a type of hedge fund. They could, if they did it right, buy at low prices and sell at high prices and reap the rewards faster without having to bother with the mess of collecting taxes owed.

This does not mean that they do not offer a high return opportunity as it stands, but it does mean that they are currently not ideal for hedge fund type investments.

Risk against reward:

Regardless of whether or not they operate as a hedge fund at present, tax privileged investors highly appreciate this type of investment. Whoever invests in this market can expect an average gain of about ten percent on expenses and the average purchase of lien will see a fifty percent refund in the first year. Not without risk, as there is no set deadline and foreclosure can be a long undertaking, these are still seen as a favorable source of investment for many looking lower risk and moderate returns.

Who should make the investment?

Despite what has been said above, are on the list of those who generally seek these types of investments – such as corporations and regional lien pools – hedge funds and private equity firms. They are ideal for those who are not looking for easy liquidity and those who are properly supported by a competent legal team.


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