Should Life Insurance Companies Invest in Hedge Funds?
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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.