Best Special Report: Favorable Hedge Fund Returns Drive Insurers’ Book Value Up
OLDWICK, NJ–(BUSINESS WIRE)–Despite significant challenges in the hedge fund industry in 2021, such as GameStop’s short squeeze, insurance companies still allocated nearly $1 billion in new hedge fund investments in 2021, according to a new AM Best report.
In his Best Special Report, titled “Favorable Hedge Fund Returns Lead to Increases in Book Value for Insurers,” AM Best says insurer holdings grew in 2021 in adjusted book/book value (BACV) and actual number of holdings . The BACV rose from $12.3 billion in 2020 to $13.1 billion in 2021, the second consecutive year the BACV has increased after several years of divesting stakes in hedge funds.
“Hedge funds have generally been viewed as an unfavorable asset class given the volatility of returns and fee structure,” said Jason Hopper, associate director, industry research and analysis, AM Best. “However, during the pandemic, hedge funds have offered several advantages to mitigate the adverse effects of COVID-19, including less downside and volatility and largely independent of stock market trends, thereby reducing correlations with broader markets. ”
Despite favorable returns, the hedge fund industry still struggled in 2021, according to the report; in particular, the short squeeze initiated by retail investors in GameStop and heavily shorted companies, which resulted in losses of over $10 billion and led to the collapse of Archegos Capital. Moreover, stock market volatility towards the end of the year led some insurers to reduce their long/short positions in equities, a strategy favored by insurers.
Nonetheless, the hedge fund exposure of the insurance industry, which is heavily concentrated in a small population of insurers, increased by 6.5% in 2021, with an additional $834 million in holdings. Insurers’ investments in hedge funds increased to 861 holdings in 2021, from 811 in 2020. The life/annuities segment saw its dollar exposure to hedge funds increase by 14.0% to $6.1 billion, and the P&C segment by 0.9% to $6.7 billion. , after several years of decline.
The first quarter of 2022 marked the largest allocation of new capital in a quarter since 2015, largely due to uncertainty surrounding commodity prices, geopolitical tensions and rising levels of inflation. These factors contributed to global macro strategies being among the most popular in the quarter. While these economic and geopolitical challenges are generally negative, the uncertainty can bring benefits to the hedge fund market due to their lack of correlation with other typical asset classes. Ultimately, the lingering effects of the pandemic and continued market uncertainty will determine whether the hedge fund market continues to see renewed interest and greater exposures.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=320356.
To watch a video chat with Hopper and Michael Lynch, Associate Analyst, AM Best, about this report, please visit http://www.ambest.com/v.asp?v=ambhedgefunds622.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in more than 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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