SUMMARY

Seeking input on an idea for a new organization.  It would offer profit opportunities through loans with interest rates tied to variables of each client’s choosing.  Let’s call it HedgEverything for now.  Possible variable examples relevant to EAs:

-Global temperatures

-Maximum computing speed

-Nuclear warhead inventory

-USA livestock slaughter totals

-Global malaria cases

-USA incarcerated population

HOW IT WORKS

1) Client requests variable exposure, also specifying maturity and principal amount.

2) HedgEverything researches inquiry, creates objective benchmark, principal amount, maturity, and interest rate quotes as counter-offer.  Interest rate quote examples: 

- WHO reported global malaria case annual growth, plus 1%

- ((1+WHO reported global malaria case annual growth)^4-1), less 5%[1]

3) If Client accepts the counter-offer, loans money to HedgEverything at the stated interest rate, achieving variable exposure.

4) HedgEverything invests the loan, repays principal and interest at maturity, keeps excess profits.

DEMAND

I believe there are three main sources of demand for HedgEverything: mission-correlated investing, profit-seeking, and human capital hedging. 

MISSION-CORRELATED INVESTING

There is a compelling case for mission-correlated investing[2].  Michael Dickens has several interesting EA forum posts on this topic[3][4].  HedgEverything may increase the efficacy of mission-correlated investing by providing a more precise investment vehicle than those available in traditional public markets.  Example: if a client would like to profit from an increase in CO2 emissions, it may be more beneficial to loan to HedgEverything with an interest rate based on world CO2 emissions[5], rather than purchasing stocks in the energy sector.

HedgEverything would face stiff competition from investment banks and insurance companies for business from mega charities (e.g. Open Philanthropy Project, FTX)[6].  However, HedgEverything may be more flexible in some instances and the mega charities may view supporting HedgEverything as valuable, given its broad EA applicability.    

PROFIT-SEEKING

I expect many people have strong beliefs, but lack the ability to profit from them.  HedgEverything would give them the opportunity.

HUMAN CAPITAL HEDGING

An individual (or wealth manager on their behalf) may wish to hedge “human capital”[7].  Example: a pilot may wish to profit if major airline carriers switch to pilotless planes.

SUSTAINABILITY

Creditworthiness of HedgEverything is paramount.  I have some funds from savings, but require more for a thriving operation.  In the long-term, I roughly estimate that HedgEverything would need at least USD$5M to USD$10M in consistent principal value to be self-sufficient.

I believe I have enough experience[8] with markets, risk and reward to avoid "underpricing" these loan liabilities, but it will be a challenge and a financial cushion is important to reduce risk of analytical failure.  

Economies of scale exist.  A larger organization would benefit from loan diversification, and could transact in higher minimum size vehicles, such as weather futures and insurance products.  It could also hire analysts and other staff.

CONCLUSION

Thanks for reading!  Feedback is welcome.  What variables would you be interested in, if you were a client?  At first glance, offering you woefully incomplete information, do you believe I should create this organization and leave my industry career?  If I did, what are my best next steps for funding, etc.?  

Disclaimer: nothing in this post is investment advice.

Thanks to Michael Dickens, Brian Tomasik, and Julia Wise. 

  1. ^

    Clients may prefer outsized payouts in disastrous scenarios, discussed with Brian Tomasik

  2. ^
  3. ^
  4. ^
  5. ^
  6. ^

    Discussed with Michael Dickens

  7. ^
  8. ^

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8 comments, sorted by Click to highlight new comments since: Today at 10:37 AM
New Comment

In the long-term, I roughly estimate that HedgEverything would need at least USD$5M to USD$10M in consistent principal value to be self-sufficient.

I'm curious how you came this estimate as it seems low to me. It sounds like you are basically proposing a boutique insurance company / market maker / hedge fund, which involves a lot of expenses: reinsurance, legal, regulatory, compensation for skilled financial analysts, etc.. What sort of spread are you envisaging charging?

I estimate reinsurance and regulatory costs would not be overburdening.  HedgEverything would likely be unreinsured at first, and I believe HedgEverything's service would not be a "security" as defined by the SEC, and it wouldn't be a pooled investment.  I could be wrong - it's worth a quick look from a lawyer.

Analysts are costly.  The minimum estimate given is based on a spread of 2% to 4%.  This is the scenario in which I do everything and consume all the coffee.

Thanks for putting this idea out there, Michael!

I have several questions, all in the spirit of helping you sharpen up the idea:

  • Why a loan product? Is that to mimic cat bonds? Standard insurance (just pay the premiums) would be even easier for the client wouldn't it?
  • It seems to me that existing players (banks, FTX) have a strong competitive advantage in formally creating new products. Perhaps this organization could have more value add as an advisory/intermediary. Helping clients implement and manage such strategies (part of which may include helping with design/specification of the products). Have you considered that?
  • On profit-seeking, if there was big enough demand out there, wouldn't prediction markets be bigger already? 

Happy to talk offline too. But I do like seeing open discussion of these ideas on the forum. Whatever input you get on this post will hopefully be useful for others considering similar ideas. For now mission-correlated investing and related ideas seem mostly academic (and perhaps private/secret). If you find otherwise it would be exciting to see that shared.

Why a loan product?

 

I find it's a simple structure, and it doesn't require a ton of operational costs (see my response to Larks' comment).

Perhaps this organization could have more value add as an advisory/intermediary

Interesting idea.  A different version of HedgEverything could be the connection between clients and product makers.

On profit-seeking, if there was big enough demand out there, wouldn't prediction markets be bigger already?

One advantage HedgEverything has over prediction markets is customization.  One disadvantage is liquidity (probably).

What variables would you be interested in, if you were a client?

I'd be interested in some variables that offer high ROI but also relate to suffering reduction from the worst (highest IR contribution) to the least. So, the reduction in abuse and neglect among animals, especially crickets since they can currently eat each other and it is relatively simple to avoid it (they are farmed in high concentrations and the cannibalism happens due to missing nutrients, such as salt).

I could also smartly tie my interest to animal welfare research, especially wild, which could expose a lot of suffering that could compel others resolve it. So, I would get even higher IR.

Then, I would tie my IR to the reduction of natural conservation, which could be popular among major stakeholders, such as ore companies, but given the welfare research high IR and negative utilitarian valuation, the companies would be compelled to take steps consistent with animal welfare but also further profit and make even more money and impact. I would add this based on the changing landscape of the welfare and its research.

do you believe I should create this organization and leave my industry career? 

First leave your industry career and keep chatting with people (mostly in EA) about this. You will gain about 40 hours per week for that, which is extremely valuable and can expedite the project pivoting even before anything happens. I don't think that you should maybe try reducing your workload since in your role it can be difficult (could express you do not care so much about your team anymore) - it could be apparent that you are staying to keep connections/income etc, which can be a rep loss risk.

 If I did, what are my best next steps for funding, etc.?

OPP offers the maybe 3-month planning grants where you can just plan your project. This can be ideal for you. The cycle is that maybe you do not get the OPP grant and need some credibility for it. You can also try the LTFF/EAIF. These should not mind if you apply again. Others, such as the Future Fund, can like excellent projects.

Try to avoid the OPP mistake where they started as trying to appeal to hedge funders through quantification but later realized that it can present publication bias (which can be difficult to undo in an established organization). I suggest that you speak with various people in EA to learn about bias mitigation. This can also connect you with more individuals familiar with funding opportunities.

Interesting idea that insect suffering connects with a few other EA issues.

Here's a scenario:

Bob runs an emergency response organization, which needs cash to scale up when an emergency hits (to hire surge staff, ramp up response operations, etc etc). Bob want to use prediction markets as a hedge, but appropriate disaster markets don't always exist plus it's hard to place high-payoff bets without tying up all his assets in the interim.

Does HedgEverything make Bob happy?

Depending on loan terms, yes.  

In this case, a "callable loan" may be appropriate, allowing Bob to access cash when the emergency hits.  However, this feature may increase HedgEverything's risk and, therefore, affect other terms.  Thank you for suggesting the potential importance of a call feature.

Bob would still need to tie up some assets by lending at the start of the agreement.

Also, Bob would need an interest rate benchmark that is updated soon after the emergency hits.  A lag in benchmark reporting could prevent Bob from calling the loan at a profit during the time of greatest need.