Kate Greubel doesn’t work on Wall Street, but she planned her upcoming vacation using the strategies of a shadowy and particularly risky corner of finance. And though most don’t know it, many other Americans are doing the same thing this time of year.
It started a few months ago, when Greubel got an airline email with some temptingly low fares. Based in the D.C. area, she and her boyfriend had been thinking about a getaway. The email triggered a search that ended with the couple booking an October trip to the Bahamas.
Just like that, she and her boyfriend had a beach vacation at a great price. They knew they were getting the deal because they planned to travel during hurricane season. Popular travel site CheapCaribbean.com says hurricane season discounts can be as deep as 60 percent from rates in February, low enough to spur many travelers to take a chance on a stormy season.
The risk Greubel was taking hit home in early October, when Hurricane Joaquin slammed into the Bahamas with brutal force. Loved ones who knew her plans were worried.
“All of our friends who knew we were going were sending us links and information,” Greubel remembered. “My boss said, ‘You do recognize it’s hurricane season, don’t you?’”
Suddenly the downside of the vacation gamble was all over the news. And it’s important to understand that’s exactly what the vacation was: a gamble. It’s risky in that it could have the high return of a great vacation on the cheap or the low return of a hurricane ruining the whole trip, maybe worse.
Those odds happen to be similar to those faced by investors who specialize in distressed assets. They place bets on companies and countries in their worst moments.
“These are things that will come very cheap because there’s a high likelihood that you could lose all of your money,” explained Seoyoung Kim, finance professor at Santa Clara University. “But there’s also that chance that you may hit a very huge payoff in the end.”
For example, some of these investors are currently focused on American Apparel, which recently filed for bankruptcy after a long nightmare of falling sales and drama involving its ousted founder. If the company turns around, it’ll make a killing. If not, it stand to lose just about everything it put in.
Professional investors can hedge bets by investing in many different distressed assets, so a few big wins make up for all the losses. Travelers considering a risky hurricane season vacation can hedge, too.
“You can take out travel insurance,” said Pauline Frommer, of the travel guidebook series that bears her family name. “Then you know you will get your money back.”
The U.S. Travel Insurance Association said coverage generally costs 4 percent to 8 percent of the trip’s total price. Frommer recommended shopping for insurance through comparison sites like SquareMouth and InsureMyTrip, which enable travelers to compare offers from different insurers. But just like on Wall Street, hedging can reduce returns. Whatever’s spent on insurance can eat up some of the money saved by booking during hurricane season.
As for Greubel and her own investment in Bahamas leisure, fortunately, she and her boyfriend had booked dates after the storm blew through. Their hotel is intact and their island getaway begins Wednesday.
They knew the risk and rolled the dice. It’s not that different for a hedge fund billionaire betting on a bankrupt company or a young couple wagering the winds won’t ruin their umbrella drinks. Gamblers shouldn’t make risky bets unless they can deal with the downside.
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