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

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

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

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.

Hedge Lending: Using Stock Portfolio Money to Invest in Real Estate 2

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.

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