Market Overview

A.M. BestTV: Volatility, Fees Cool Insurers' Ardor for Hedge Funds, Says A.M. Best Associate Director


In this A.M.BestTV episode, Jason Hopper, associate director,
industry research and analytics, A.M. Best, said insurers have
become more selective in their use of hedge funds. Click on
to view the entire program.

For a second straight year, the insurance industry has pulled back on
its hedge fund investments. Hopper believes hedge fund performance is a
dominant factor.

"Volatility is not an insurer's best friend. Especially when the two
preferred strategies of hedge funds—equity long/short and
multi-strategy— ave been a little volatile this year," said Hopper. "Fee
structures, I think, is the other factor, potentially pushing some
insurers out of the hedge fund space or at the least reducing their
over-allocations to hedge funds."

Hopper also highlighted how A.M. Best is looking at changes in hedge
fund investment strategies.

"Property/casualty and life/annuity insurers' have about 9% of their
hedge fund holdings allocated to distressed security hedge funds. Those
types of funds typically back non-investment grade organizations or
companies that are in bankruptcy or close to default. If the credit
markets make a wider turn toward the negative that would definitely be
something A.M. Best would more closely monitor and analyze," he said.

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