Favorable hedge fund returns lead to higher book value for insurers: AM Best

According to a new report from AM Best, despite significant challenges in the hedge fund industry in 2021, such as GameStop’s short squeeze, insurance companies have still managed to allocate nearly $1 billion to new investments in hedge funds in 2021.

In ratings agency Best’s special report, “Favorable Hedge Fund Returns Lead to Increases in Book Value for Insurers,” AM Best said insurers’ holdings increased in 2021 in adjusted book value terms. /counter (BACV) and in real numbers. of participations.

In 2021, the BACV rose to $13.1 billion, from $12.3 billion in 2020, the second consecutive year the BACV rose after several years of divesting hedge fund stakes.

Jason Hopper, Associate Director, Industry Research and Analysis, AM Best, said: “Hedge funds have generally been viewed as an unfavorable asset class given the volatility of returns and fee structure. 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.

However, according to the report, the hedge fund industry still had problems in 2021, especially with the short squeeze initiated by retail investors in GameStop and on heavily shorted companies, which resulted in more than 10 billions of dollars in losses and led to the collapse of Archegos. Capital.

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Nonetheless, AM Best noted that the insurance industry’s hedge fund exposure grew 6.5% in 2021, with an additional $834 million in holdings.

Investments by insurers in hedge funds also increased to 861 holdings in 2021, a sharp increase from 811 in 2020.

The life/annuity segment saw its dollar exposure to hedge funds increase by 14.0%, to $6.1 billion, and the property and casualty segment by 0.9% to $6.7 billion, after several years of decline.

Additionally, AM Best pointed out that Q122 marked the largest allocation of new capital in a quarter since 2015, which was largely driven by uncertainty surrounding commodity prices, geopolitical tensions and rising oil levels. inflation.

These factors contributed to global macro strategies being among the most popular in the quarter.

Nevertheless, 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.

AM Best, however, said 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.

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