According to a new AM Best report, despite significant challenges in the hedge fund industry in 2021, such as the GameStop short squeeze, insurance companies still managed to allocate nearly $1 billion to new hedge fund investments in 2021.
In the rating agency’s Best’s Special Report, titled, “Favorable Hedge Fund Returns Lead to Book Value Increases for Insurers,” AM Best stated that insurers’ holdings increased in 2021 in aggregate book-adjusted/carrying value (BACV) and by the actual number of holdings.
In 2021 BACV increased to $13.1 billion, from $12.3 billion in 2020, the second consecutive year that BACV has increased after multiple years of divesting holdings in hedge funds.
Jason Hopper, associate director, industry research and analytics, AM Best, said: “Hedge funds generally have been perceived as an unfavorable asset class given volatile returns and fee structure. 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.”
However, according to the report, the hedge fund industry still had trouble in 2021, in particular with the short squeeze initiated by retail investors in GameStop and over heavily shorted companies, which resulted in over $10 billion in losses and led to the collapse of Archegos Capital.
Nonetheless, AM Best noted that the insurance industry’s hedge fund exposure grew by 6.5% in 2021, with an additional $834 million in holdings.
Insurers’ hedge fund investments also grew to 861 holdings in 2021, a big increase from 811 in 2020.
The life/annuity segment saw its dollar exposure to hedge funds rise by 14.0%, to $6.1 billion, and the property and casualty segment by 0.9% to $6.7 billion, following several years of declines.
Furthermore, AM Best highlighted that Q122 marked the largest allocation of new capital in a quarter since 2015, which was largely driven by the uncertainty surrounding commodity prices, geopolitical tensions and the rising levels of inflation.
These factors contributed to global macro-strategies being among the most popular for the quarter.
Nonetheless, while these economic and geopolitical challenges are generally negative, the uncertainty can bring advantages to the hedge fund market due to their lack of correlation with other typical asset classes.
AM Best, however, stated that the lingering effects of the pandemic and ongoing market uncertainty will determine if the hedge fund market will continue to see renewed interest and greater exposures.
This website states: The content on this site is sourced from the internet. If there is any infringement, please contact us and we will handle it promptly.
