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Alternative Market Briefing

Solvency II may deter insurance companies from investing in hedge funds

Monday, October 29, 2012

Benedicte Gravrand, Opalesque Geneva:

Some people think that the regulatory push for more collateral will not be so much of an issue for hedge funds (see Opalesque Exclusive here). However, not everybody agrees with that view.

The Solvency II Directive is a European Union (EU) Directive that codifies and harmonises the EU insurance regulation. It mainly concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. Once the Omnibus II legislation is approved by the European Parliament – and this might now not happen before March 2013 - Solvency II will be scheduled to come into effect in 2014 or 2015. Often called "Basel for insurers," Solvency II is somewhat similar to the banking regulations of Basel II.

The current draft directive allocates a 49% capital requirement for investment into hedge funds, private equity and other alternative assets (classified as "other equities"). This means that for every euro invested in such funds, insurers will be forced to put aside additional cash to cover their investments, reduce their allocation to the asset class or withdraw from investing in such funds altogether (TheDeal).

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