The Hollywood Hedge

With all the glitz and glam, in true Hollywood style, private investors and Wall Street investors are making a killing – or so they think. In point of fact Hollywood production companies are one-upping investors.

Indie film makers aren’t the only ones looking to fund the next project, big production studios are in the money game too. Difference being, large Hollywood studios like Paramount, Warner Bros. And Legendary Pictures don’t really need private investors and hedge funds to finance their next blockbuster. They sell enough DVD’s, TV rights, and movie paraphernalia to front the money on new productions. But, why risk your money when someone is willing to gamble theirs.

Despite the movie industry making millions, or even billions, studios cry poor all the time and surprisingly it works. Hedge fund investors are more than willing to invest financially in productions for an exclusive chance to capitalize on the profits gained from the internal rate of return.

The internal rate of return takes into account the entire studio earnings from every source, including: DVD’s, TV rights, movie paraphernalia, licensing, in-flight movies, foreign screenings, product placement and foreign investments. In a dreadful year filled with flops Hollywood studios can have a 15 percent internal rate of return. Let’s face it that’s not small potatoes. The internal rate of return could jump to 28 percent with even a single epic success, think Titanic (1999-2000).

You don’t need to be a financial whiz kid to see that a 15-30 percent return on investment is worth the risk. Even with the studios keeping a distribution fee of 10 percent before divvying up the profits to Wall Street this as a very appealing opportunity. Merrill Lynch provided 18 percent of the capital through hedge funds for 26 Paramount productions in 2004/05. The deal lasted until 2007 – 2008 saw the global economic crisis where hedge funds crashed.

Some Hollywood studios only offer hedge funds the chance to capitalize on current productions and don’t offer their investors the internal rate of return. Either way big Hollywood studios make unbalanced deals with Wall Street by raking in a distribution fee before sharing revenue with investors.

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