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hedge fund investing for insurance companies

An activist hedge fund aims to invest in businesses and take actions that boost the stock price which may include demands that companies cut costs. Insurers have particularly focused on private equity and hedge funds. In , US insurers' total investments in private equity and hedge funds, including those. Having complained for years about hedge funds' high fees and lacklustre performance, insurance firms may be preparing to cut allocations to. BTC STARMAKER SEASON 4

Firms have learned from the credit crisis that investing in fixed income does not automatically protect from value impairments. Therefore, many life insurers are now keeping greater attention on portfolio total returns, while still investing to maximize book yield. In that light, they are starting to grow modest exposures to less correlated hedge fund and commodity investments to reduce aggregate portfolio volatility and increase risk-adjusted total returns.

As a result, their general account reserve portfolios are generally significantly smaller relative to their premium flows when compared to those of life insurers, who need to save up for large, predicable future payments. This limits the need for large, long-term investment portfolios. However, health insurers do maintain focused long-term investment portfolios to both protect against unanticipated claims incidence and boost corporate returns.

Leading health insurers have been seeking to mitigate the effects of the low-yield environment by adjusting their portfolios in favor of higher returning assets, and have approximately doubled their allocation to Schedule BA assets 2. Many are also attracted to its lack of mark-to-market pricing, avoiding the earnings volatility generated by public equity investments.

Even in the life segment, certain income-oriented strategies, such as mezzanine finance, have been preferred, and many insurers are reallocating their alternatives portfolios toward greater hedge fund exposure upon maximizing their illiquid equity-risk budgets. Although subject to mark-to-market driven earnings volatility, hedge funds present a very attractive value proposition for many insurers, leading to strong recent growth.

Furthermore, experienced portfolio strategists may assemble multiple investments into customized, liability-driven portfolios in a way that other alternatives cannot. Furthermore, certain delivery vehicles, such as hedge fund managed accounts, provide look-through transparency to underlying securities holdings, allowing for improved monitoring and, in certain circumstances, superior capital treatment.

Challenges to executing an effective alternatives strategy Insurers are struggling with a number of issues as they strive to incorporate alternatives into their portfolios in a cost-effective and risk-managed fashion: Educating investment team and management — lack of detailed knowledge and awareness of alternatives inhibiting investments.

Constrained portfolio management resources — Internal personnel lack time to properly research and oversee alternatives. Ensuring the security of investments and validity of information — Critical to managing risk and avoiding unanticipated investment failures. Concerns about high fees — Standard fee structures can be challenging to justify use of alternatives.

Minimal insurance knowledge in the alternative space — many managers view insurers as identical to all other institutional investors. Alternatives industry is product, and not solutions, focused. Each presents a unique impact on both outsourced and internally managed alternative investment programs. Insurance company implementation tactics To address these challenges and grow their exposure to alternative asset classes, insurers are taking advantage of diverse hedge fund and private equity access points.

Historically, firms have relied primarily on the shelf fund-of-funds vehicles. However, along with the double layer of fees, these portfolios are rarely optimized for insurance companies objectives. Insurers are also beginning to retain these firms to assemble fully custom portfolios optimized for their unique needs. By retaining managers of managers that have an actionable understanding of insurance investments and regulatory constraints, insurers may investment disciplined alternatives portfolios constructed to maximize diversification benefits within insurance company general accounts, in order to best capitalize on RBC or economic capital model covariance factors to reduce net capital charges under US statutory or Solvency II regimes.

Increasingly, insurers are turning to managed accounts providers, particularly for hedge funds and managed futures solutions. These managed account platforms provide the reduced fees, security, transparency, and liquidity of segregated investments, alongside the superior manager access and disciplined due diligence provided by multi-manager providers. By , hedge funds were up again, returning 6.

This is a perhaps-exaggerated difference but in line with historical data: From through , hedge funds averaged returns of 6. Does that mean in the debate between hedge funds vs. Not necessarily. Who Can Invest in Hedge Funds? Because of the higher levels of risk associated with hedge funds, the U. To invest in hedge funds as an individual, you must be an institutional investor, like a pension fund , or an accredited investor. However, more people qualify now than was initially intended.

How to Invest in Hedge Funds To invest in hedge funds, first research funds currently accepting new investors. There is no standardized method or central accreditation authority. Each fund determines your status using its own practices. You may have to provide your income, assets, debts and experience and have this confirmed by licensed third parties, like a financial institution you have accounts with, an investment advisor or an attorney.

You can find ETFs, mutual funds and funds of funds that use similar strategies to hedge funds, like short-selling or leveraged investing, says Brewer. Historically, broad market indices have outperformed hedge funds, so you may be better off investing in index funds instead. Continuing to investing in index funds through years when the market is down and hedge funds are supposed to shine allows you to buy low and enjoy higher returns when the market recovers.

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How Life Insurance Companies Invest Your Premiums - Explained


Getting the right coverage in place does require an investment of time and effort, as insurance policy wordings tend to be very technical documents. Unfortunately there are numerous examples where policy wordings have not proved fit for purpose or appropriate procedures are not in place so as to access the insurance cover when required. In this article we examine some of the dangers and pitfalls for insurers in the asset management industry and offer some tips on practical steps for policyholders looking to maximise their insurance coverage.

The basic characteristics of these policies are shown in Table 1. Whilst these are important questions, they do not go nearly far enough and are potentially meaningless. The directors of funds and managers may even be at risk of criticism or claims against themselves if there is a failure to access insurance cover due to their lack of understanding of the insurance position or how the policy operates.

Not all policies are the same. The inter-relationship between the fund s and the manager including the effect of indemnities needs to be understood, and the insurance policy wordings may need to reflect other contractual arrangements. As a matter of English law, insurance policies are usually treated as commercially negotiated contracts with the policyholder considered to have equal bargaining power with the insurer.

Many policyholders do not use that bargaining power but purchase insurance based on lowest price, and do not give the time and effort to their insurance contracts which they would to other commercial contracts. As in so many things, you often get out what you put in. Minor variations in wording or other clauses which may appear to be boilerplate or standard, but the consequences of which are not fully understood, can have disastrous consequences in terms of limiting coverage.

Too often the terms of insurance policies are not fully understood and, in particular, the consequences of failure strictly to comply with terms — such as the notification of circumstances or claims — can give insurers an opportunity to deny coverage which would otherwise have been available. Red lights on policy wordings There are a number of recurring problem areas with insurance policy wordings covering hedge funds which cause difficulties in making recoveries from insurers.

Composite policies This is a policy which covers both the manager and the fund under a shared or combined limit of indemnity. Obviously there is a risk that the policy limit may be exhausted, particularly by a large PI claim against the manager, leaving the directors of the managed funds with no effective insurance cover. Another difficulty with this type of policy is that claims by one insured i.

If such exclusionary language is not properly qualified, the manager may have no insurance coverage and the fund no recourse against the insurance company, in the event that the fund does have a claim against the manager. Careful analysis should be given to any US exposures which a particular fund or manager faces in the conduct of its day-to-day business so that these aspects of policy wordings can be negotiated and tailored to ensure that there is effective insurance coverage for the risks to which a particular business is exposed.

Indemnities The inter-relationship between insurance policies and any indemnities given, for example an indemnity from the fund to the manager and their respective directors, should be considered carefully. This is particularly important if the manager and the fund have separate insurance cover in place. All too often an insurance policy has proved unresponsive as the relationship between the policy and other sources of protection, such as indemnities and other insurance cover, has not been properly thought through.

The insurance market has a language all of its own. This means that, even if you do read the policy, you may not understand the full implications. For example, a warranty in the context of an insurance policy is a very significant term indeed. Unlike in other commercial contracts, the remedy for breach of warranty is not damages according to what loss has been caused by the breach of warranty. Whole-life insurance policies allow the cash value to grow free from income tax and can be structured to avoid estate tax.

Deferred annuities can also allow investment balances to grow without being taxed until the return is distributed years later. These insurance products are expanding the range of allowable investments to include hedge funds, extending their favorable tax treatment to hedge fund returns.

One new development that is being used to fund tax-favored hedge fund investments involves reinsurance. Most reinsurance companies involved in hedge funds have been located in Bermuda, which has no corporate income tax. It is important that the reinsurance company is located outside the United States and other locations with corporate income taxes to avoid the double taxation of the investment returns.

It is important, also, that the business is an insurance company, because they alone are exempted from special provisions designed to prevent U. It is, therefore, important that the reinsurance company actually operates as an insurance company to receive this special treatment. The business is diagrammed in Figure 3. Investors deposit cash as equity investments in the company. The company receives insurance premiums in return for sharing liability on insurance contracts.

The reinsurance company holds the premiums until a claim or claims are made. Typically, the reinsurance company pays out all of the premium income or more but keeps the investment returns on the money while it held the reserves. The reserves plus much of the reinsurance company surplus are invested in hedge funds. The returns on the hedge funds accumulate tax-free. The underwriting profits premiums minus payouts or losses payouts minus premiums accumulate along with the hedge fund returns.

The reinsurance investors expect that when they sell their shares, the investment returns and the underwriting gains or losses will be taxed as long-term capital gains. The reinsurance companies that invest in hedge funds have generally been closely associated with particular hedge fund managers. Hampton Re organized by J.

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