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Portfolio > Alternative Investments > Hedge Funds

Hedge Funds Gaining Favor Among Insurers

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NEW YORK (–The insurance industry is ripe for hedge fund managers to grab a bigger chunk of its investment assets, according to a new study by Swiss Re America Holding Corp.

Competition is forcing insurers to ask themselves if they or a third party can best maximize the risk and return tradeoff for their investment assets, according to a report on the study, called “Third Party Asset Management for Insurers.” As a result, the insurance industry is turning increasingly to third party asset managers. Hedge funds, in particular, are attractive targets for that movement, Swiss Re said. “It’s the same story as for other types of investors,” said David S. Laster, senior economist for Swiss Re. Insurers, while not historically a big player in hedge funds, are warming up to the idea of putting some of their assets into hedge funds, he said.

And like other institutions, they’re doing so only when greater transparency becomes available, and when they can fit into portfolios from a risk management perspective, he said. Smaller insurers are likely to outsource their entire investment portfolio, but large insurance companies are more likely to outsource only for its more esoteric investments, such as hedge funds.

Based on data from the industry, such as a report from Goldman Sachs, Swiss Re estimates there is US$10 billion to US$15 billion of insurance assets invested in hedge funds, still a very small part of overall assets. Swiss Re expects insurers alternative asset holdings, which includes hedge funds and private equity, to grow 10% per year over the next several months.

Some of the biggest insurance industry investors in hedge funds are reinsurers, some of who are betting big on hedge funds. XL Capital Ltd, Hamilton, Bermuda, is a big investor in hedge funds, as well as in the companies they manage. The company recently entered into a joint venture to offer passive hedge fund investments to insurance companies.

Mr. Laster noted that unlike the pension industry, the insurance market doesn’t rely heavily on gatekeepers to select outside managers. Only about 20% of insurance companies use a consultant to help select managers, while about 80% of pension funds do, he said. Swiss Re itself is making an effort to break in to the gatekeeping market, using its recently purchased subsidiary, Conning Corp., to give insurers guidance on selecting alternative investments, he said.


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