He Dies, You Make Money

While it’s a different kind of future than we’re used to talking about – the concept of saving money for your future has been around before futures existed. But the way we save has been evolving ever since the word retirement has been around. The concepts of pensions, 401ks, and Roth IRAs are the first to come to mind;  but not so long ago the most popular way of saving in the early 1900s was investing on the idea that others would die before you, called the Tontine. No, not this tauntan:

Tontine Tauntaun

The Washington Post had a rather detailed report on how the now illegal retirement plan could potentially be the future of retirement plans that fill in the gaps of a pension plan or 401k.

“Tontines, you see, operate on a morbid principle: You buy into a tontine alongside many other investors. The entire group is paid at regular intervals. The key twist: As your fellow investors die, their share of the payout gets redistributed to the remaining survivors.

In a tontine, the longer you live, the larger your profits — but you are profiting precisely off other people’s deaths. Even in their heyday, tontines were regarded as somewhat repugnant for this reason.

At one point, more than 9 million tontine policies existed in the United States, in more than 18 million households, representing around 7.5% of the nation’s wealth. Besides the fact that you take profit from others dying, it’s popularity led to lots of money coming into policies, and eventual fraud with those in charge of that money.  Tontines were eventually banned in response, but some economists suggest that banning the concept might have been an overreaction. Via the Washington Post.

“This might be the iPhone of retirement products,” says Moshe Milevsky, an associate professor of finance at York University in Toronto who has become one of the tontine’s most outspoken boosters.

Suzanne Shu, an associate professor at UCLA’s business school, argues that such an arrangement can feel more psychologically fair. Retirees often object to annuities because they worry about not living long enough to make the money back. This is the nightmare scenario: If someone dies the day after she buys an annuity, the insurance company walks away with the cash scot-free. In a tontine, that money passes on to help fund other people’s retirements. (Depending on how psychopathic you are, this is either a positive feature or a murder incentive.)

We’ll leave the debate over whether someone can make more money by outliving others to lawmakers, but we can’t help but think a financial version of the Tontine would be a great way to ensure investors stick with their investments.

What if a mutual fund or hedge fund stipulated that 50% or so of your investment was redistributed to the other fund investors should you pull out of the fund before some set term (call it 5 years). No investors would agree to this, of course – but imagine the benefit it would have on the all too common problem of investors getting out at the lows and in at the highs.  You would have a very clear incentive for not panicking during a down turn (panic and you lose 50% of what’s left),  and would definitely think twice before pulling the trigger on that high flying fund (am I willing to endure a down turn for 3+years to not lose my money).

The goals of the investors and managers would be aligned – fees could come down because the managers would know their customer lifecycle more clearly; and long term investors could make money off their willingness to stick out an investment.

Maybe Tontines are how it works in galaxies far, far away where they have Tauntauns.

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The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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