When Takeshi Obata wrote the Japanese Comic (Manga) “Death Note”, I’m sure he wasn’t expecting the financial industry to take that up literally. A “Death Bond”, by definition, is a security backed by life insurance which is derived by pooling together a number of transferable life insurance policies. Similar to mortgage-backed securities, the life insurance policies are pooled together and then repackaged into bonds to be sold to investors (Source).

I thought it interesting to learn that Davidson Kempner Capital Management, a $10 billion New York-based fund, is planning on selling “death bonds” to overseas investors. This basically means that the bonds will be backed partially by the death benefits the hedge fund is entitled to collect on the life insurance policies it acquires. Speculators like Davidson buy insurance policies at a deep discount to their death benefit and continue to pay the premiums—betting the seller will die before the policy terminates!

Once life settlement providers buy a person’s life-insurance policy, they would then resell the policy to hedge funds or investment banks who accumulate 100 to 200 policies before packaging the warehouse of policies into asset-backed securities, or Death Bonds. Returns on Death Bonds are estimated by the industry to be around 8%.

Davidson is not the only one to have eyes on this market though. Goldman Sachs, Bear Stearns and Lehman Brothers also seem to be charging ahead to create a market for these Death Bonds.

How’s that for an alternative investment with low correlation to the markets?

.Felix