Meet the Hedge Fund Manager Delivering Stellar Returns with a Unique Insurance Based Risk Neutralizing Strategy
In investing, we know there is no free lunch. With higher returns comes increased risk.
But what if you could neutralize some of the variables that create risk in traditional investing? What if timing or pricing the market, or being right about the direction was no longer necessary for a profitable trading strategy?
Meet Paul Regan— a man who has created an arbitrage-based strategy that successfully does exactly that. And his innovation goes far beyond successful trading by pairing an actual insurance policy with each investment. We sat down with Paul to learn more about his unique innovation and new line of funds.
Disrupting Traditional Risk Management
David Dewell, a top commodities trader at Goldman Sachs, was quoted as saying, “What Paul Regan has done in terms of risk management and creating a world of future date certain returns is like what Elon Musk has done in the automotive industry. This level of disruption is world class and to call it game-changing doesn’t begin to explain it or do him justice.”
Can You Create Future Date Certain Returns?
Trading commodities has historically been all about attempting to profit by anticipating future price direction. Investors put their money on a directional move, whether that was in gold, silver, soybeans, or something else.
What if you took a totally different stance? What if you employed an agnostic approach instead of trying to predict the whimsical twists and turns of the commodities markets? Mr. Regan has developed a system that takes advantage of the sometimes wild volatility of these markets but doesn’t involve speculation. This new approach generates steady, market-beating returns in all market conditions. Best of all, the investment comes with a guarantee you’ll receive at least a 24% annual return and won’t lose a dime.
Yes, it sounds too good to be true. But Mr. Regan has a secret: he has developed a unique partnership with several major insurers who agreed to back his strategy. So this time, it really is different.
Doing The Near-Impossible
In the investment world, achieving high returns with low risk is akin to finding the Holy Grail. But, Mr. Regan’s past experience illustrates why he has been able to accomplish this seemingly impossible task of providing certain returns in an uncertain world. He’s been hard at work as a financial engineer for decades. Meanwhile, he has beaten the S&P 500 index for the past 10 years as a trader.
He is the first hedge fund manager who has successfully gained the support of major insurance carriers who are writing policies exclusively for his fund, Next Level Holdings, LLC. These policies enable him to contractually neutralize market and transactional risk for his investors. This allows the fund to ensure a consistent 24% annual return to those investors who are lucky enough to gain entry into one of his exclusive hedge funds. And that phenomenal yearly return? Guaranteed by the insurers.
How Exactly Did He Accomplish This?
In today’s challenging market, we find ourselves in complete awe of this accomplishment. Somehow Mr. Regan has brilliantly engineered an arbitrage-based fixed-income product. This has been attempted previously without success. What has Paul Regan done differently? We asked him directly so we could find out.
First off, Paul, we understand this is an arbitrage-based strategy. Can you explain arbitrage trading for us?
Regan: Of course. Arbitrage is a form of trading in which traders exploit price discrepancies between the same investments in different markets. Arbitrageurs buy in one market while simultaneously selling an equivalent size in a different but related market. They do this to take advantage of price divergences between the two.
Sometimes, products that are effectively the same thing, trade in different places or slightly different forms. For example, some large companies are listed on more than one stock exchange. Theoretically, as the shares on each stock exchange belong to the same company, they should be priced equally.
However, the flow of information to all parts of the world is not instantaneous. Furthermore, markets do not operate with complete efficiency. When both stock exchanges are open, the share price may differ between them. The first person to notice the price difference could buy the stock on one exchange at the lower price while selling on the other at a higher price. In doing so, they secure a quick profit.
I’ve been an arbitrage trader of commodities for decades, so this is my investing backyard, so to speak.
So how do you turn arbitrage trading into consistent results?
Regan: I recognize that for the purpose of this article we have some limits, so I’ll make this simple. We’ll just use gold as an example. The gold market is extensive and worldwide. Gold investments range from actual physical metals to financial products that allow you to buy a digital claim to gold. This provides many opportunities for arbitrage across geography, time and form.
Many people today opt for a gold ETF, which is a type of digital representation of gold ownership. Instead, imagine you buy long-term contracts which enable you to purchase physical gold directly from miners at predefined discounts below the spot (market) price.
What if you could presell all that gold to international refineries at prices at or above the spot price before you actually paid for the gold? This is the purest form of true arbitrage you’ll find in the financial markets, as it eliminates execution risk. You can lock in a profit before risking capital.
This is precisely what I’ve perfected. This is how I won over the insurance industry, and this is how I have been able to consistently beat the S&P Index.
That is fascinating. Can you walk us through an example?
Regan: Sure. The spot price of gold today is around $60,000 per kilo. Now let’s say I wanted to sell 100 kilos of gold at that price. I could move 100 kilos to any one of my refineries in minutes with no problem. So by selling those 100 kilos, I generate about $6 million. Upon locking in that sale price, I then go direct to my consortium of mining groups. These entities are all under exclusive contracts where I pay them 3% below the spot price for that same 100 kilos. That costs me $5.82 million. I then arrange shipping of those 100 kilos directly to my refineries. That’s it.
I have now generated $180,000 with no risk by preselling the gold. This is just a modified form of arbitrage.
That 3% net difference is the key. That’s prenegotiated and helps out the mining groups. These firms are happy to sell their product for a slight discount below spot with long term volume contracts, zero marketing costs, and access to capital that otherwise wouldn’t exist.
So now we rinse and repeat. Turning our capital over three or four times every 30 days generates 9% to 12% returns each and every month. Instead of 100 kilos of gold, my fund is turning over closer to 800 kilos a month. That’s around $50 million in monthly transactional volume, and we have the capacity to grow to 5,000 kilos of monthly volume this year. This is where my investors win by placing their capital next to mine.
At the end of the day, we are generating returns of around 80% per annum after expenses. About one-third of that goes straight back to investors in our fund.
Wow, that is innovative. Is there more to this strategy?
Regan: Yes—and this aspect is even more of an innovation. We guarantee our investors a minimum 24% return, and guarantee against the loss of principal.
As you might suspect, this makes the Next Level Fund quite unique. While many products guarantee principal protection, I am not aware of any that also guarantees a specific future strong return. (Annuities, for example, are the complete opposite, with notoriously low returns.) With our fund, we guarantee an annual return starting at 24% but increasing to 40% for those investors who invest with us for a longer term and agree to lock ups.
How can you legally make a claim it is guaranteed?
Regan: First off, I agree with an old investment axiom: If something sounds too good to be true, it’s because it probably is. Guaranteed returns—aren’t. Every investment carries some degree of risk. This is generally reflected in the rate of return you can expect to receive. If your money is perfectly safe, you’ll most likely get a low return. High returns entail high risks, possibly including a total loss on the investment. Our fund is completely different.
Why is your fund different?
Regan: The first part of my model is the arbitrage component. There’s minimal risk because I sell first and then buy, but there is always some transactional risk. You can’t get away from it. But the insurance industry was founded to provide guarantees. We rely on insurance to protect our lives: our homes, our businesses, and our health. So this is where my model excels: we rely on insurance to provide a true contractual guarantee.
What makes me different is why my investors love me: I succeeded in getting the insurance industry to understand our trading model. Now, these insurers have “priced the risk.” Because I pay them premiums, they are happy to issue coverage.
It is important to note that the insurance companies issue the guarantee directly to my investors. It’s not through our fund or our firm. That provides the next level of assurance since the policy is issued in your name.
It’s no different from how they would quote your premium for a life or health insurance product. Based on the investment size, we have the insurance carrier directly issue the surety bond in our client’s name.
It’s pretty simple, but it’s a new concept in the hedge fund business where losses and wild volatility are the norm.
So, to clarify, your guarantee is a separate insurance policy?
Regan: Yes, that’s it! The “guaranteed return” policies are issued to our investors directly from licensed and regulated major insurance carriers and not from our firm. I am sure that if we attempted to offer “guaranteed returns” directly, we would run into issues with the SEC and various other regulatory bodies and consumer protection agencies. It wouldn’t be prudent.
This is where I came up with the idea to pair my investment offerings with insurance products. That would ultimately give our investors the highest level of assurance and certainty in a very uncertain world.
Our insurance is high quality too. All of our surety bonds and insurance policies are issued by Lloyds of London or other firms carrying investment grade ratings from AM Best.
Can you tell us a little more about how you were able to partner with these insurers?
Regan: Great question! It’s actually what I am most proud of. Most people assume that creating the model is my crowning achievement, but that’s not the case.
Getting the insurance industry to bet big on me was a monumental achievement. Everyone in the financial industry knows that the insurance industry is incredibly regulated, conservative, bureaucratic and slow-moving.
When I approached insurers, I was immediately subjected to intense scrutiny. I endured several forensic financial audits that spanned over 21 long months. Initially, I was forced to put up eight figures in counter-guarantees. There was a never-ending mountain of legal documents and bureaucratic red tape before I could obtain the backing from the insurers we now work with. But it was worth the pain, as we now can issue our investors policies insuring against loss and guaranteeing a minimum return of 24% per annum.
How long have you been successfully applying this strategy?
Regan: It’s been six years now. However, only within the last year were we able to roll out the insurance policy with surety bond protection for our investors.
Why haven’t we heard of you before?
Regan: That’s a very subjective question, but I am not by any means a household name nor do I aspire to be. Plus, I’ve had my head down for the past several years developing this methodology and arm-wrestling with the insurance industry.
I am a small player in relative terms of assets under management, and I prefer it that way. My focus is on results. I have achieved success because of the fact that I am small and agile, so I never want that to change. My investment strategy is inspired by Sun Tzu, legendary military strategist from ancient China. He was a master of agile warfare and preferred to win without fighting or, if that was not possible, pick the easiest battles. That’s how I run my funds….we stick with our strengths. We’re not looking to outgrow what we do best.
I also don’t look for attention. While my name may not ring bells, I bet you’ve heard of my insurance partners. Lloyds of London, Afiancol Insurance, RedBridge Insurance, Ocean Reinsurance, these are all big names and you can say that I am standing on the shoulders of giants in that regard, however, I really value my privacy. Since I am happy to trade my own capital, there was no real upside for me to seek the spotlight. Now that I am actively launching my own funds, there is an obvious utility to these sorts of interviews, at least for the time being.
How much money do you currently manage?
Regan: I’ve developed and refined my strategy with my own capital, which I consider essential. As an investor, you want your managers to have skin in the game, and you get it with me. Since I started offering insurance policies, I’ve only recently started accepting outside investors.
I’m currently managing around $50 million, most of that being my capital. Unlike most traditional fund managers, my niche doesn’t allow me to scale into the billions, nor is that size and scale appealing to me.
Tell us a little about your personal life…what do you do when you’re not thinking about arbitrage and investor insurance policies?
Regan: I am a proud father and born-again Christian. I practice something called Bushido and live according to a strict code of honor and morals developed by Japanese samurai. I love the seven principles of Bushido and practice them daily.
I am also a huge adrenaline guy. I like extreme sports and anything that allows me to test my mental fortitude and self-imposed psychological and physical limitations. I also love donating funds to help underprivileged children in the regions of Colombia where we have most of our relationships with artisanal and small to medium-sized private mining operations.
How many funds do you currently manage?
Regan: Three. I want to keep it that way. I like simple, and I like easy. These three hit the investment goals and objectives of nearly anyone I might speak to, regardless of age, risk appetite, investment goals, or suitability. My lineup includes the Next Level Income Fund, the Next Level Growth Fund and the Next Level Retirement Fund.
Why would people invest?
Regan: Really….(laughs) aside from guaranteed returns? (Laughs again.) Well, I always like to use the most popular benchmark of performance that professional investors typically use, the S&P 500 Index.
Before I explain how I have crushed the S&P Index in terms of risk-adjusted performance, I want to highlight a little-known fact. Over 90% of hedge fund managers don’t even match the S&P Index. In the years 2011 through 2020, the S&P 500 beat the average hedge fund every year.
Yet if we compare my Next Level Growth Fund where investors get a guaranteed APY of 33.3% ROI, you would need to go back to 1995 (28 years ago) to find a year where an investor would have seen a better return.
Now…to do that with the addition of an insurance policy guaranteeing an index-beating return? You tell me what you think. (Laughs again.)