“In their hunger for supernormal returns, hedge funds have been known to speculate on everything from the price of corn to hollywood box office returns (recently, on their own existence). It makes then to sense to turn to the source of it all - new ideas. This time they may be on to something. Nathan Mhyrvold (of Microsoft fame) runs Seattle-based Intellectual Ventures which has over 20,000 patents under management with thousands more filed every year. It’s a privately held company and verified numbers are hard to come by but Mhyrvold has been quoted as saying that the fund has returned over $1B in licensing fees with some individual payments in the range of $200-$400M. These are promising numbers and the fund has recently raised a further $2.5B bringing nearly $5B under management on patents alone. If you think about it, these are insane numbers.

To put this in perspective, the entire venture capital industry in the U.S. spent $28B last year on new ideas. As an asset class this is sustainable as innovation follows power laws with successful investments hitting it out of the park paying for the rest. However, the vc model is still expensive. Going further upstream means getting things cheap and if you know what you’re looking for (Mhyrvold has rocket scientists looking at rockets not spreadsheets) the potential for profits is mind boggling.

Ordinarily, this should be good news. Traditional venture capital gives life to intellectual property assets that create jobs and grow the economy. Unfortunately, Mhyrvold and gang are far more opportunistic locking up patents for cheap and selling them to the highest bidder. Worse still there is a clear patent arbitrage opportunity to strategically acquire patents and hold innovators hostage. For example, owning a strategic patent for a certain drug delivery mechanism that works best for an awesome cancer cure can be super lucrative even if you don’t invent the cure (just wait for somebody else to do it). These patent thickets are a big problem in biotech and patent funds will only make the problem worse. We’ve seen hedge fund wreck markets before only this time by locking up the source of new ideas we may end up killing the goose that lays the golden eggs. ” -kmangalam

“I think innovation is good and enlightening dark tunnels regardless of whether a pot of gold or a skeleton is found helps progress in general. The Madoff’s, Milikens as well as the Edisons and Einsteins have pushed progress, granted some have been unf. burned in the process. In the case of Mhyrvold; I applaud his effort in finding and taking advantage of this ($Bn) opportunity.

I for one am not a huge fan of squatters (domain name, realestate, patents …etc), but I have come to terms with the fact that they are optimistic opportunists in a capitalistic economy. As long as there is a tangible value in what they hold (in this case patents), there will be room for arbitrage and room for portfolio like holding companies/funds for these assets (similiar to realestate, domains ..etc). I do agree that practices such as these affect innovation, but I’m a huge fan of building constraints … as I feel that is where true ingenuity and resourcefullness shines. If we can’t climb the wall, we’ll either figure out a way to tunnel under it or fly over it. ” -navchatterji