Funny diversification
Who says investment can’t be plain fun? The Norwegian financial newspaper Finansavisen brought up a new asset class that can be fun to diversify into[1], the world of models. In short we’re talking venture capital by funding the start of a new modeling career.
The opportunity is provided by the modeling beuro Beauty Holding Ltd (hereafter BHL) [2], that started up in June of this year. The company, registered in the tax heaven Jersey, is founded by former top model Ingrid Devatova.
What is interesting is the risk/return evaluation, as you can purchase and sell shares in the models at any time until they reach the goal of $10,000, at which point the modeling company organizes photo-shoots in Paris and London. The returns of the first year is then shared 50/50 between the model and the sponsors. The 50% that goes to the sponsors is then distributed according to the buy-in , so that an $100 investment gives 1% of the return dedicated to sponsors (as total is $10,000).
Herein, however, also lies an obstacle. As the additional risk of investing early does not give a greater pay-off than investing late, one is really incentivized to wait till a model approaches the $10,000 before going in with anything. One thing that could be helpful in order to increase investments would have been to separate the payoff into trenches.
exempli gratia such that investment $0-1000 gets 12-15% of the payoff rather than just 10%, the next 1000-5000 gets a somewhat less share than that again, and the last 5000 gets slightly less than the respective percentage handed out today.
One thing that speaks in favor of today’s system is the ability to sell shares at any time, and as such you can re-allocate whenever someone approaches the threshold level, but it still doesn’t provide incentive to invest early.
Note that the numbers above are completely arbitrary, and the actual division would have to be based on an empirical analysis of returns as well as the amount of time it takes to reach the different levels in any such system.
As this asset class is not correlated (less correlated) with bonds and equity markets, it provides a fun way to spend pocket-money and masquerade it as diversification into a new asset class. And one gets responses from the different assets (girls) on the message board as time goes with updates and greetings.
For BHL it is also profitable, as they don’t pay out anything until the assets reaches $10,000. The costs are not covered by the company, so in theory they can just put the money into interest-bearing papers and collect the interests, or build a more risky portfolio to increase the returns even more. Granted this can provide incentive for the company NOT to consider any trenching system in order to give quicker funding, a good example of principal/agent costs in finance.
If you want to read more about this scheme, visit beautyholding.com and check it out yourself. It can be quite a lot more fun than just looking at numbers all day 
[1] Finansavisen,23. august 2008, pages 40-41
[2] http://www.beautyholding.com/
