Though fund managers face a demanding client base in insurers, which require much more transparency and detailed reporting than other institutional investors, the insurance marketplace still is new enough to hedge funds that managers may see few competing peers, says the report from Patpatia & Associates. That could mean opportunities for forwardthinking hedge fund managers. “It’s still a comparatively underserved market,” says Bill Limburg, senior associate at Patpatia. “We believe there is room for firms that take a more solutionsbased approach to gain assets and share.”
The report outlines how insurers pulled back from hedge funds in the wake of the 2008 financial meltdown, but then “steadily rebounded.” Insurance company assets invested in hedge funds totaled $11.1 billion in 2009, but nearly doubled to hit $21.1 billion by 2013, the most recent year data was available. Insurance companies have traditionally invested almost all of their general account assets in fixed income securities, though many have been slowly adding equities in recent years and, even more recently, alternatives. Especially in the low yield postcrisis environment, some insurance companies see hedge funds as a way to get a little extra alpha, though most observers say it’s mainly about gaining diversification.
Insurers are also raising their exposure to other alternatives, notably private equity, but not by as much: allocations to hedge funds “have grown at an 11.4% CAGR from 2008, surpassing private equity allocation growth in the same time period” of 8.9%, the report says. Multistrategy “remains the most popular choice” for insurers, with 32% of investors holding such funds, according to Patpatia’s report, though this figure is down from 43% in 2008. Secondmost popular is longshort equity, although this too may not be as dominant: “Some [investors] expressed that it will not be their preferred focus moving forward,” the report says.