Solvency II : A unique opportunity for hedge fund strategies

There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/liability profile efficiently.

Author(s):

Mathieu Vaissie

Research Associate, EDHEC-Risk Institute,Senior Portfolio Manager, Lyxor AM

Changes in the regulatory framework and in accounting rules make it even trickier for insurance companies. Against this backdrop, insurers have no choice but to rethink their overall investment policy. 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. We argue in this article that a Solvency capital requirement of 49% does not reflect the risks inherent in hedge fund strategies. We find that a capital charge of no more than 25% is deemed appropriate for a diversified hedge fund allocation, and conclude that hedge fund investing is appealing from both a risk-adjusted performance standpoint and a capital efficiency perspective. Contrary to the conventional wisdom, Solvency II could be a unique opportunity for hedge fund strategies to find their way into insurers' core portfolios.

Type: Working paper
Date: le 19/01/2012
Research Cluster : Finance

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