Transcript Should Life Insurance Companies Invest in Hedge Funds?

Should Life Insurance Companies
Invest in Hedge Funds?
Thomas Berry-Stölzle,
Hendrik Kläver, and Shen Qiu
Discussion by
Monica Marin
Ph.D. Candidate, Finance
University of South Carolina
Objective to Investigate:
 Should life insurance companies invest in hedge
funds?
 How much to invest?
 Impact of insurer’s characteristics:
 Liability Structure
 Capitalization
 Restrictiveness of Accounting System
Summary
 Model: a life insurance company offering contracts
with a cliquet-style interest rate guarantee
 Extension to Kling, Richter, and Ruβ (2007), by
incorporating 3 correlated AR(1) GARCH(1,1)
processes
 Monte Carlo Simulations for different asset
allocation strategies
 Calculate Markowitz efficient frontiers
Findings
 Benefits from investing in hedge funds:
 Expected portfolio return is increased
 Portfolio volatility is reduced
 Benefits are greater when:
 The interest rate guarantees are higher
 Insurer’s capital is lower
 Higher expected returns in the case of event-driven
hedge funds
Comments & Suggestions
 Provide some statistics on the actual investment in
hedge funds by life-insurance companies
 Explain why you are generating the correlated
AR(1) GARCH(1,1) processes
 Striking result: high percentage of hedge funds
(70%-90%) in the portfolio!
Table 2
Mean Return & Std. Deviation
(Convertible Arbitrage)
Returns & Standard Deviations
9.00%
8.50%
E(R)
8.00%
7.50%
7.00%
6.50%
6.00%
0.00%
5.00%
10.00%
15.00%
StDev
20.00%
25.00%
Comments & Suggestions (Cont.)
 In addition to the survivorship bias, also
acknowledge the backfill bias (Malkiel & Saha
(2005))
 Hedge fund returns have on average a relatively
low standard deviation.
 Report additional moments (skewness, kurtosis) in
Table 2.