Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Insurance-linked securities are ‘genuine alternatives’


The world of alternative investments encompasses many different asset classes and types of investment that are said to help diversify investment portfolios by offering opportunities which are less correlated with traditional types of assets. However some are beginning to say that institutional investors are in danger of over-allocating themselves to alternatives which are perhaps not as alternative as they may think.

A study from Towers Watson recently stated that pension funds now allocate as much as 19% of their investment into alternative assets, that figure used to be 5% back in 1996. That number if expected to rise as more fund managers seek opportunities to achieve better returns and safer returns than are currently being seen in equities and sovereign investments.

This article in the Australian Financial Standard, suggests that some investment managers are being sold alternatives which are not so alternative, offer more ordinary diversification, ordinary returns and could be bought in a more traditional manner. There seems to be a buzz around alternative investment opportunities which is leading some investment managers to make poor decisions.

However, the article suggests that there are real alternatives to be had (what some now call alternative alternatives) and the investment consultant in the Financial Standard article says they are a sound investment “genuinely alternative and can be bought in a competitive way”. He does say that the current buzz about alternatives means that there is more capital to put into them than can be satisfied with supply (sound familiar?).

The investment consultant, a former chief investment officer, said of insurance-linked securities such as catastrophe bonds that they were “the most genuine alternative with very little link to equity markets”.

So the lesson seems to be; don’t put too much of your investment capital into alternatives, unless you are certain they really are alternative and you can handle the lack of liquidity that comes with a more niche and esoteric asset class.

Read our article from yesterday on correlation and insurance-linked securities.

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