Insurance linked investments outlook bright as hedge fund assets grow

by Artemis on March 28, 2014

The future looks bright for insurance linked investments as institutional investors such as pension funds continue to grow their allocations to hedge funds and are increasingly willing to diversify into new asset classes such as reinsurance and catastrophe risk.

A report from hedge fund publication Absolute Return shows that the assets under management at U.S. hedge funds have now grown to a level which exceeds the pre-financial crisis peak. Absolute Returns report on hedge funds which manage more than a billion dollars shows that the assets of firms included grew by more than $250 billion in 2013, the highest growth since 2007.

Absolute Return tracks 293 billion dollar plus hedge fund firms and says that their assets grew by 17.16% in 2013 to a combined total of $1.71 trillion. That overtakes the previous all-time high set in the middle of 2008 of $1.68 trillion. Of course this dwarfs the insurance linked investments and insurance-linked securities space which is around the $50 billion mark.

Much of this new capital is going to the larger hedge funds, with the breadth of their distribution networks helping some to grow significantly over the course of the year. However the driver for growing assets at hedge funds is the desire among institutional investors to source diversified yield driving investments which can provide their overall portfolio with some protection against market risks due to lower correlations than many more traditional investments.

Of course in the broader hedge fund market the outsize returns are also an attraction, however for institutional investors such as pension funds the broader hedge fund market provides diversification, sometimes lower correlation and this means that hedge funds are increasingly featuring in their new allocations.

When you think of hedge funds which offer a reliable return beating many traditional bond or fixed income strategies, a true diversification and a very low correlation with wider financial market and economic indicators, one of the first to come to mind should be insurance linked investment funds.

As institutional investors increasingly look to diversify and access the returns of hedge funds, insurance linked investment managers, insurance-linked securities (ILS), catastrophe bond investment strategies and other reinsurance linked investments are set to benefit from increased inflows.

As a component of the increasingly mainstream alternative investments space, ILS, catastrophe bonds and insurance linked investments are among the most attractive in terms of true diversification. As awareness of the ILS and reinsurance asset class grows we can expect inflows to increase, perhaps dramatically if the overall ILS market can find the opportunities to put institutional money to work.

The appetite of institutional investors is moving towards ILS and reinsurance linked investments though. As these investors increasingly seek sources of diversification and investments which can help to protect them against market risks through lower correlation, it stands to reason that the knowledge and understanding of ILS will spread.

If the insurance linked investments space can harness institutional investor appetite and grow its assets under management by 17% each year, we could see a significantly larger capital market involvement in reinsurance in years to come.

Also read:

Hedge funds to see strong institutional inflows, good for ILS funds.

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