Insurance companies allocate almost $1bn to new hedge fund investments

Written by Adam Cadle

01/06/2022

Insurance companies allocated almost $1bn to new hedge fund investments in 2021, according to AM Best.

In its report, Favourable Hedge Fund Returns Lead to Book Value Increases for Insurers, AM Best said the insurance industry’s hedge fund exposure, which is highly concentrated among a small population of insurers, grew by 6.5% in 2021, with an additional $834m in holdings. Insurers’ hedge fund investments grew to 861 holdings in 2021, from 811 in 2020. The life/annuity segment saw its dollar exposure to hedge funds rise by 14.0%, to $6.1bn, and the property/casualty segment by 0.9% to $6.7bn, following several years of declines.

Insurers’ holdings increased in 2021 in aggregate book-adjusted/carrying value (BACV) and by the actual number if holdings BACV rose to $13.1bn in 2021 from $12.3bn in 2020, the second consecutive year that BACV increased after multiple years of divesting holdings in hedge funds.

“Hedge funds generally have been perceived as an unfavourable asset class given volatile returns and fee structure,” AM Best associate director, industry research and analytics, Jason Hopper said.

“However, during the pandemic, hedge funds offered several advantages to mitigate the adverse effects of COVID-19, including less drawdown and volatility and largely independent of stock market trends, thus lowering correlations with broader markets.”

The hedge fund industry still had some trouble in 2021 according to the report. In particular, the short squeeze initiated by retail investors in GameStop and over heavily shorted companies, which resulted in over $10bn in losses and led to the collapse of Archegos Capital. Additionally, stock market volatility toward the end of the year led to some insurers reducing their long/short equity positions, a strategy favoured by insurers.

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