Fund Generates Big Returns In Spite Of Unsavory Annuity, Other Deals

Platinum Partners has had a terrible year in every way but one.

In January, regulators sanctioned an outside broker doing business with the hedge fund for running what they called a “scheme to profit from the imminent deaths of terminally ill patients.” In August, prosecutors in Louisiana filed criminal charges against an oil company that had been Platinum’s biggest investment in connection with an explosion that killed three workers. And last month the former head of an energy company in which the $1.4 billion fund had a significant stake was arrested for tax evasion.

The good news: Platinum says it’s making money, just as it has in each of the past 13 years. Since it was founded in 2003, its main fund has gained an average of about 17 percent annually, according to an investor presentation. That’s on a par with the world’s best-performing hedge funds, such as Bill Ackman’s Pershing Square Capital Management and Israel Englander’s Millennium Management.

Platinum’s specialty is investing in companies that others avoid, such as payday lenders or high-flying Singaporean penny stocks. The firm has never been sanctioned by regulators and even thrived while investing hundreds of millions of dollars in what turned out to be two Ponzi schemes. Mark Nordlicht, the former commodities trader who founded Platinum, says his main concerns are limiting risk and making money.

“We’ll scour the four corners of the earth for the best risk-adjusted strategy,” Nordlicht said in an interview. “If things don’t work out exactly as forecast, our investors still end up with principal, a robust interest rate or potentially an asset at an attractive price.”

The main fund, Platinum Partners Value Arbitrage, has returned about 8 percent this year, according to the investor presentation. Nordlicht said that the fund has made good bets in biotechnology and on a planned chain of mini-marts in rural China. Another winner has been a startup electricity retailer called Agera Energy, he said.

The investment connected with terminally ill patients shows the lengths Platinum will go to find a can’t-miss bet. Insurance companies were offering variable annuities -- a type of guaranteed investment contract -- with bonuses that only applied when the investor died. A broker approached Platinum in 2007 with an idea, according to the U.S. Securities and Exchange Commission: Find people who were near death and buy contracts with their names using the fund’s money. With the bonuses, the fund could earn 5 percent, risk-free, as soon as each person died.