LONDON (Reuters) – Having complained for years about hedge funds’ high fees and lacklustre performance, insurance firms may be preparing to cut allocations to the sector after its poor performance during recent market upheaval left many of them nursing losses.
That would be a problem for hedge funds, as insurance companies are huge investors, managing around $20 trillion of assets globally.
It would also be a challenge for insurers, which have been hoping hedge funds would deliver market-beating returns to help them meet billions of dollars in pandemic-related payouts.
One of the primary objectives of hedge funds is to preserve clients’ capital during market downturns. But the industry mostly failed to do that in the first six months of 2020, losing an average of 3.5%, according to Hedge Fund Research (HFR).
An index fund tracking the S&P500 would have lost 3% in the same period.
(Graphic: Hedge fund annual returns – https://graphics.reuters.com/HEALTH-CORONAVIRUS/INSURANCE/xlbpgjloovq/chart.png)
For European insurers, the underperformance is a double blow, as they incur extra capital charges to hold investments classed as risky.
“The average hedge fund would not be a good investment,” said Urban Angehrn, chief investment officer at Zurich Insurance , which says a $120 million fall in hedge fund gains versus last year contributed to a drop in first-half profits.
Angehrn said there were exceptions but “in aggregate, unfortunately, (hedge funds) don’t do a very good job in creating extra performance.”
While Zurich earned a better-than-average 2.9% from its hedge funds between January and June, that was down from 9% in the same period a year earlier. It has around 1% of its $207 billion asset portfolio in hedge funds and Chief Financial Officer George Quinn told Reuters last month it did not plan a “significant shift” in allocations.
Overall, though, European insurers’ median hedge fund holdings have been falling, hitting 1.5% in September from 2% four years before, data from Preqin shows.
Less than a fifth of global insurers plan to add to hedge fund allocations in the event of persistent volatility over the next three to six months, a State Street survey showed in June, while Goldman Sachs Asset Management’s July survey found that even before the pandemic, insurance firms were cutting hedge fund investments.
“I don’t anticipate COVID leading to increased allocations to hedge funds,” said Gareth Haslip, global head of insurance strategy and analytics at JPMorgan Asset Management.
(Graphic: Insurers’ allocations to hedge funds [in %] – https://graphics.reuters.com/HEALTH-CORONAVIRUS/INSURERS/xegpbjogkpq/chart.png)
DAMAGE
Most major insurers do not provide detail of their hedge fund exposure in earnings reports, but Dutch group Aegon told Reuters it had cut allocations to riskier assets by more than 20% as underperformance of hedge funds inflicted losses of $50 million in the first half of 2020.
“Given the current environment, we decided to somewhat de-risk our investment portfolio and have lowered our exposure to hedge funds and private equity to $1.482 million per June 30, from $1.830 million per December 31, 2019,” a spokesman said.
U.S. insurer AIG said earnings in its general insurance business suffered in the first quarter from a $588 million drop in net investment income, mainly due to hedge funds. AIG declined to comment on its allocations.
Bucking the trend, reinsurer Swiss Re’s hedge fund investments edged up to $355 million at June 30 from $352 million at the end of 2019. A spokesman declined to comment on future investment plans.
European insurers’ hedge fund allocations have room to fall as they are above global averages. It’s also costlier to hold hedge funds after Solvency II regulations introduced in 2016 required insurers to set aside more capital against riskier investments.
Those regulations have partly driven recent falls in hedge fund allocations, according to Andries Hoekema, global insurance sector head at HSBC Global Asset Management, but he noted holdings were down also in Asia, which hadn’t tightened rules.
“In Asia, we have some evidence of insurers replacing hedge fund exposure with private equity,” Hoekema said.
This was “driven partly by the more attractive returns of private equity and partly by the disappointing diversification properties of some hedge fund strategies in recent years,” he added.
($1 = 0.8545 euros)
(Reporting by Maiya Keidan and Carolyn Cohn in London, additional reporting by Toby Sterling in Amsterdam; editing by Sujata Rao and Mark Potter)
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
