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Original Risk: A Society for Change Agents

Investors hunting uncorrelated alternative asset classes, ILS likely to benefit


Investors of the world are increasingly expecting a widespread downturn in the equity markets, leading to search for new sources of alternative return, particularly asset classes that are less correlated with broader financial trends, says Preqin.

diversificationThe Preqin investor outlook for alternative asset classes in the first-half of 2019 states that now as many as 61% of institutions believe equity markets have reached, or neared, a peak at the start of the year.

The proportion of investors believing that has steadily been on the rise, Preqin say, with sentiment for a market correction rising.

This is having an effect on how institutional investors allocate to alternative asset classes, the alternative investment data provider says, with factors such as diversification, hedging, and the overall lack of correlation all rising in importance.

“The roles that alternative assets perform for investors are becoming more pivotal in the face of a potential downturn,” Preqin explains.

Adding that investors are beginning to act, with around 25% looking to allocate more to private capital, given the market outlook, while another 40% of investors in vehicles such as hedge funds are becoming increasingly defensive through their portfolio allocations.

Of course all of this points to a good time to be offering insurance-linked securities (ILS), catastrophe bonds and other reinsurance risk-linked investments, as these constitute an asset class that is about as removed from equity market movements, when it comes to correlation, as investors can get.

The ILS asset class continues to demonstrate its value as an alternative asset class that provides a return which is relatively uncorrelated from global economic and financial market factors.

By investing directly in insurance and reinsurance risk premiums, institutional investors can harness a source of return that can provide stability across the financial cycle, with risks linked to unrelated factors.

Of course nothing in this world is completely uncorrelated when the largest, market moving natural events occur.

But ILS continues to promise a return that is valued by many investors, as evidenced by the persistence of the majority even after the two years of historic catastrophe losses just suffered.

The group of investors attracted to ILS related returns continues to expand as well, with interest increasingly shown in regions such as Asia (join us at our upcoming conference to learn more about ILS in Asia) and Latin America as well.

As the ILS market and reinsurance in general, moves forwards from the last two loss years and implements learnings to better insulate their capital providers when these types of loss years occur, the diversifying nature of the asset class will only become more apparent, as managers look to deliver stable performance.

If investors are increasingly on the hunt for alternative assets with low levels of equity market correlation, they really should look at ILS, cat bonds and reinsurance as one of the most relevant options.

Amy Bensted, Head of Data Products at Preqin, commented on the developing trends among investors, “Concerns about the future trajectory of equity markets have moved to the forefront of investors’ thoughts in the past 18 months. It’s no surprise that this is throwing the role of alternative assets into sharper focus – among the advantages that investors cite are its long-term performance, diversification and non-correlation; key tools for capital protection in the face of a downturn.

“The general outlook is positive for the industry: investors have turned increasingly to alternatives through the long boom period, and their appetite does not look set to diminish with the onset of more difficult times. Indeed, the industry is likely to play a key role in helping institutions navigate short-term headwinds.”

However, investors are increasingly educated and discerning as well, meaning the best managers can often hope to reap the greatest levels of inflow, when investor heads turn in hunt of diversification.

“This appetite comes with greater scrutiny: across all asset classes, investors are putting their faith in experienced fund managers and truly non-correlated strategies, adding to the challenges facing less experienced managers and more trend-following strategies,” Bensted said.

As we’ve explained before, there is as much as $1 trillion of dry-powder capital looking to find opportunities in alternatives. If ILS and reinsurance can attract just a little of this, it could be gamechanging for the efficiency of insurance as a whole.

Encouragingly, Preqin’s information concludes, “In the longer term, the net majority of investors across all asset classes intend to increase their allocations to alternative assets.”

That has to bode well for continued increasing interest in ILS and reinsurance, as an investment opportunity worth putting the time into understanding.


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