Alternative Beta Partners launches its own insurance-linked securities index

by Artemis on August 24, 2010

Alternative Beta Partners, a multi-strategy asset management firm which was spun out of Partners Group, have just issued a press release announcing the launch of its own insurance-linked securities index the ‘AltBeta ILS Index’. They push their index as an alternative to existing indices which they term deficient (they explain that below).

What makes this index exciting to us is the fact that it is investable. That is really going to be attractive to investors and help them make decisions on entering the asset class. It’s also another great step forwards in transparency for the market. Full press release below.

Alternative Beta Partners releases investable index for liquid insurance-linked strategies

Alternative Beta Partners, a quantitative multi-strategy asset management company recently spun out of Partners Group, announces the launch of its “AltBeta ILS Index”. The index is based on the firm’s recently published research which provides strong evidence that the liquid parts of the insurance-linked strategies (ILS) asset class – such as cat bonds – are predominantly driven by what is commonly referred to as “alternative beta”, a risk premium which can be systematically captured and replicated. The specific ILS risk premium has significant appeal to investors as a result of (i) the causal independence of the underlying insurance loss processes with financial markets and (ii) the relatively high risk-adjusted premiums.

The goal of the AltBeta ILS index is to fill the prevalent gap of a useful benchmark in this asset class not only by addressing the deficiencies of existing – and recently announced – ILS indices, but also by suggesting a concrete underwriting (selection) overlay for the index constituencies as a basis for making the index investable. Existing ILS indices lack some of the features of an appropriate index, i.e. representativeness, measurability, accuracy, and investability. First and most seriously, they are non-investable (and do not incorporate rebalancing and management costs); the second serious deficiency is that they lack representativeness. Especially the disadvantage of being significantly overweight in US wind exposures reduces their practical applicability.

Samuel Scherling, Managing Director, Head of the ILS business at Alternative Beta Partners and a member of its Management Board, comments: “ILS has enjoyed tremendous increase of investor support in recent years and is bound to continue growing at high rates. The establishment of an investable index of insurance-linked strategies is a next step in the development of this asset class towards the mainstream investor. The availability of such an index should further increase the attractiveness of insurance-linked strategies, such as cat bonds.”

Dr. Lars Jaeger, Chief Executive Officer of Alternative Beta Partners, adds: “The introduction of an investable index for insurance-linked strategies is yet another example of alternative beta made accessible to investors in a cost-efficient, transparent and liquid format. Our research to be published in a highly regarded academic journal indicates that insurance-linked strategies (ILS) are predominantly a source of alternative beta: Against the payment of a risk premium, investors assume natural catastrophe and other insurance risks. What used to be considered skill-based “alpha” and came with significant cost layers has by now been identified as risk premium driven beta returns which cannot only be described, analyzed, modelled, and quantified but most importantly be made investable in a much more investor-friendly form than through the existing format of high cost hedge funds or other “traditional forms” of alternative investment products.”

The index (Bloomberg ticker ALTBILS ) is specifically designed to construct investment vehicles providing liquidity at Net Asset Values at frequencies as high as weekly. It incorporates management and rebalancing fees and thus reports on a net of cost basis.

We’re intrigued by this new index and how it could differ to the others available. Unfortunately it’s not currently available on Bloombergs website to chart but when it is we’ll bring you a view of it.

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