Tue, May 26, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Solvency II could be a Unique Opportunity for Hedge Fund Strategies: Lyxor

Monday, January 30, 2012
Opalesque Industry Update - There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/liability profiles efficiently. Changes in the regulatory framework and in accounting rules make this even trickier for insurance companies. Against this backdrop, insurers - especially those with long-term liabilities - have no choice but to fully rethink their overall investment policies and long-term strategic allocation.

Contrary to the conventional wisdom, Solvency II may thus create a sound opportunity for hedge fund strategies to find their way into insurers’ core portfolios.

While the benefits of hedge fund strategies in asset liability management have been documented in the academic literature, the integration of these strategies into the global asset allocation of insurance companies may be jeopardised by recent developments on the regulatory front. Since the Solvency II framework aims to improve the understanding, and in turn, the control of different types of risk, Lyxor’s research starts with a discussion on how to gain a proper understanding of the embedded risks of hedge fund strategies, arguing that it is now possible to perform a reliable risk/return analysis on hedge fund strategies, similar to that carried out on traditional asset classes.

New forms of investment vehicles such as separate or managed accounts make it possible for insurance companies to gain exposure to hedge fund strategies with sufficient transparency and liquidity to perform a reliable risk/return analysis. As a consequence, Lyxor argues that there is no reason why hedge fund strategies should be placed in the “other equities” category, next to “emerging equities”, “private equity” or “commodities”,and suffer such poor treatment as in the standard approach.

The Solvency II directive appears to be very much influenced by traditional investors’ practices, and certain risk mitigation techniques turn out to be somewhat ill-suited for activelymanaged long/short portfolios. A Solvency Capital Requirement of 49% then would clearly not be representative of the risks embedded in hedge fund strategies. A capital charge of no more than 25% would deem to be appropriate for a well-diversified hedge fund allocation.

Bespoke solutions are increasingly considered by institutional investors in an attempt to maximise the benefits they derive from hedge fund investing. In this respect, this research suggests that the Solvency Capital Requirement of the different hedge fund strategies can be easily factored into the portfolio construction process, and a solution may be designed that is optimal from both a risk-adjusted performance and a capital efficiency standpoint.

The results of this research show that hedge fund strategies not only appear to provide insurance companies with an appealing solution from an investment perspective, but they also look to be efficient from a capital efficiency standpoint. Against all expectations, hedge fund strategies could end up playing a greater role in the future investment policy of insurers.

Reference: Vaissié M. (2012), Solvency II: A Unique Opportunity for Hedge Fund Strategies, Lyxor Research Paper, January, www.lyxor.com

(Research Flash)

Lyxor Asset Management derives its established experience as a leading asset manager from a unique and thorough research expertise. More than 20 research professionals are exclusively dedicated to providing macro-economic, alternative and quantitative research across all Lyxor businesses. The solid synergies developed between fund managers and research specialists ensure the robustness of every investment process. Their comprehensive missions involve hedge fund sourcing and selection, cross-asset investment strategy, risk analysis, and the design of new proprietary models. They also ensure regular presentations and academic publications (White Paper Series) to communicate these best practices and asset management methodologies to the industry. By focusing on critical topics such as portfolio construction, asset allocation and risk measurement, it leads to the development of new quantitative strategies and financial models that can be directly applied to Lyxor's investment solutions.


See recent coverage by Opalesque on Solvency II and hedge funds:
EDHEC Risk Paper finds Hedge Funds Disadvantaged by Current Capital Charge Requirements Source

BG

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. T Rowe's challenge to Dell deal may fuel critics of 'appraisal'[more]

    From Reuters.com: An increasingly popular tactic used by hedge funds and others to extract more money from buyouts could soon face a major courtroom test when a big investor in Dell Inc may argue that it should be paid a higher price for the 2013 acquisition of the PC maker. The strategy, known as "

  2. News Briefs - Ergen says LightSquared plan unfairly favors hedge funds, Why hedge fund managers make good advisory clients, I learned a lot about dad-bros after spending 4 days in Vegas with 2,000 hedge funders[more]

    Ergen says LightSquared plan unfairly favors hedge funds LightSquared Inc.’s bankruptcy plan gives hedge funds that invested in the broadband company a leg up while blocking telecommunications firms from competing with it, a fund owned by Dish Network Corp. Chairman Charles Ergen said in

  3. Opalesque Exclusive: SEC approves proposed changes to Form ADV, '40 Act - comment period to follow[more]

    Bailey McCann, Opalesque New York: Hedge funds and providers of liquid alternatives will want to pay close attention to proposed reforms approved by the SEC yesterday. The changes will require more frequent reporting, as well as a closer look into social media, liquid alternative strategies, and

  4. Investing - Hedge funds buy swathes of foreclosed subprimes, force up rents, float rent-bonds, Hedge funds buy Actavis, Valeant. ETFs join the party, The most loved biotechs of big hedge funds, Stocks to buy ... according to hedge funds, Atlantic City bond offering attracts hedge funds as buyers, Okumus Fund Management discloses huge new Ascent Capital Group stake[more]

    Hedge funds buy swathes of foreclosed subprimes, force up rents, float rent-bonds From Boingboing.com: When a giant hedge fund is bidding on all the foreclosed houses in a poor neighborhood, living humans don't stand a chance -- but that's OK, because rapacious investors make great landl

  5. Institutions - Institutional investors turn to real estate, planes, Assets at Boston’s five biggest family nonprofits rise to $3.5bn[more]

    Institutional investors turn to real estate, planes From Joins.com: The National Pension Service and domestic emerging market specialists who did not know where to invest in a low interest rate environment are turning to other investments like the blue-chip real estate market abroad.

 

banner