Hedge Lending: Using Stock Portfolio Money to Invest in Real Estate

hedge lending

Hedge lending is a powerful and flexible liquidity option for those who want to, in essence “stay in and out of the market” at the same time.

It essentially places a bottom on loss (borrower keeps their 90% of today’s value in cash regardless) while keeping their portfolio working for them for up to twenty years.

Getting from Stocks to Cash

One of the most common dilemma’s facing securities owners has always been how to obtain liquidity when cash is needed. The matter has been relatively simple if there were not much in capital gains to worry about, or if the individual had no further interest in holding the stocks for one or another reason.

For them, the solution has been to pick up the phone and tell their broker to sell.

But what about those stock owners who do not want to sell their shares? Perhaps they represent an investment that was bequeathed to them, or an investment in a company they had been loyal to for years.

Or, more likely, they had a portfolio of shares that had risen in value over the years and/or was already margined. What about them?

High-net worth individuals have always had the answer, typically through private banking advisors or special tax-advantaged structures offered through their brokers or boutique investment firms.

The solution for them was simple enough: Have their portfolio hedged to protect against loss, while taking out a loan against the shares at the same time, usually on very advantageous terms.

The result? A stock loan that is never called, regardless of the fall in value of the portfolio. The stock owner’s shares continue to have the opportunity to appreciate and grow, and he in essence still contractually “owns” the shares while they are pledged to the loan (though they are in the full custody of his broker and his hedge counterparties until the loan is paid off).

He obtains cash without the tax consequences of a sale, and the cash is unrestricted except that it cannot be used to repurchase margined stocks under SEC regulation.

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Hedge Lending for the Rest of Us

There have been many variations on this hedged portfolio loan model over the years, but one aspect has been almost universal:

The requirement that the portfolio be very large in value. Hedge lending only made sense to the brokers and counterparties when the portfolio was worth at least US$ 1-2 million and up, and simply was not for those with holdings of lesser value.

Today hedge lending has moved to a more sophisticated level, with far greater security and more options, and, thanks to their rapid increase in popularity over the last few years and the complex but carefully structured relationships at the back ends of these transactions, the minimum portfolio value required has fallen dramatically.

Flexible Exits

The exit strategy for a HedgeLoan is very flexible and is in many ways its most attractive feature. Borrowers, through their quarterly reports, always know where they stand and when the maturity date approaches, allowing them plenty of time to choose from three different options to close out their loan obligation.

At maturity, they can: Ask us to sell the portfolio, pay off the principal and accrued interest and remit the remaining in stock or cash back to the stock owner/borrower. This solution is chosen typically by those who have portfolios that have risen in value over the life of their loan term.

Pay off the principal and interest in cash, and have the shares freed from our custody and repatriated in full to the stock owner/borrower.

Walk away and owe nothing, with no recourse to the lender besides the shares, the famed “non-recourse” provision of hedge lending. This is the option typically used when portfolio value has fallen dramatically would be insufficient to cover principle and interest if the portfolio were liquidated.

The borrower can simply “walk away”, but unlike other loan default situations, with a HedgeLoan there is no negative report or effect on the client’s credit record, and the lender can make no demands on the assets of the borrower other than contents of the devalued stock portfolio — even if (as in the Enron case) the portfolio has become essentially worthless.

The client keeps his 90% of value from the loan”s inception, and the matter is closed.

Beyond Hedge Loans

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Hedge loans have occasionally been mated with other financial products for specific purposes. HedgeLender Corporation, for example, through its partnership with the well-regarded insurance concepts firm Emerging Money Corporation, supports EM’s Stock to Cash, whereby HedgeLoan proceeds are placed in carefully constructed programs of annuities and/or insurance contracts, producing income and/or tax and/or planning advantages to the client..

These Stock to Cash add-ons are often chosen by individuals with very specific estate planning and/or income needs, and are marketed by licensed insurance and financial professionals only.


In summary, what can we say about hedge lending as a liquidity tool today?

Hedge lending is a powerful and flexible liquidity option for those who want to, in essence “stay in and out of the market” at the same time.

It essentially places a bottom on loss (borrower keeps their 90% of today’s value in cash regardless) while keeping their portfolio working for them for up to twenty years.

It defers the need to worry about repayment until a future (maturity) date when repayment may be less of a problem.

It allows three exit strategies including a “non-recourse” fallback strategy that a client can always use even in the worst of cases. And in the case of HedgeLoan, it offers additional benefits for estate and tax planners.

In short, it’s a tool both for the modern financial professional and average investor, but unlike many other “boutique” products formerly reserved for the highest net-worth tier, it is a tool that’s now available “to the rest of us.”

And for this should all be grateful.

In part by Joah Santos