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Insurance-linked strategies can be a compelling diversifier

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Interview with Pius Fritschi – Last year, LGT Capital Partners saw its hedge funds business grow 20 per cent. This, says Pius Fritschi (pictured), Head of Hedge Fund Business Development at LGT Capital Partners, shows that demand for hedge fund strategies remains strong. But increasingly, institutional investors are searching for new sources of risk-adjusted returns when it comes to investing in hedge funds.

Diversifying strategies such as insurance-linked strategies (ILS) are one of these sources gaining traction. Fritschi says that this is helped by the fact that LGT Capital Partners is spending an increased amount of time working with clients on exploring “What if…” scenarios to arrive at optimal hedge fund strategy allocations.

“Institutions are not looking at products, they spend time looking at top-down allocations and using scenario analysis. We are one of few providers who have 10 years or more of data across all asset classes, which we can use to engage in meaningful discussion with clients, and help them understand how to use hedge funds to make their portfolios more robust.

“There are still interesting opportunities in credit but ILS is the most decorrelated of all diversifying strategies. When an earthquake happens there’s no major net impact on equity markets because some companies lose but the likes of construction companies benefit,” says Fritschi.

Insurance-linked strategies tend to fall into two main categories: firstly, catastrophe bonds, which, as their name suggests, are linked to the reinsurance of low probability high impact events such as hurricanes, earthquakes, tsunamis. Secondly, so-called ‘collateralised reinsurance contracts’, which Fritschi comments is a more specialised, wider market but with fewer participants and therefore more attractive yield opportunities.

“Within ILS, more recently there’s been pressure on returns in cat bonds. More investors are favouring cat bonds, and this is reducing return opportunities even though potential losses remain the same so the opportunity for outperformance has reduced slightly and prices have tightened.

“What we see is that more sophisticated investors are moving into the re-insurance contract space. This is where we see more opportunities.”

One of the key advantages to ILS as an asset class, aside from the decorrelation factor, is that investors can easily steer the risk/return profile. In that sense, they are a highly flexible fit for clients’ portfolios. Indeed, LGT’s own USD 9billion multi-strategy fund has been investing in ILS since 2003. One of the managers that it invested with was ClaridenLeu, a Zurich-based bank/asset manager running USD2billion in ILS. Last summer, LGT took the decision to acquire the 10-strong team when it was looking for a new home.

This is an important point. As an ILS investor itself, LGT practices what it preaches. “This helps build trust and makes a big difference,” says Fritschi, who confirms that LGT currently invests in 5 or 6 ILS managers within the portfolio. This equates to a 4 per cent allocation.

Libor plus “3 to 8 per cent” is the typical rate of return says Fritschi, depending on the level of risk investors want to take.

Reinforcing the potential benefits of ILS to investors, Fritschi concludes by saying: “People see ILS as something that works. The structure works: it’s liquid, it’s decorrelated, it offers different risk returns. It’s a proven concept and sophisticated investors are looking closely at ILS now.” 


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