According to recent fillings, top insurance companies are withdrawing millions of dollars from the hedge fund market in an attempt to limit their risk exposure in the hedge fund market.
Both American International Group Inc.
The latest report from AM best CO shows that overall, net hedge fund outflows from all US insurers amounted to $8.7 billion in 2016 and 2017, and the total insurance industry assets held by hedge funds were down 8.5 percent since this time last year, leveling off at the end of 2017 at $16.4 billion.
Not only are AIG and MetLife reducing their holdings, but six other large insurers also followed suit and decreased their hedge fund holdings in 2017. Only twelve insurers increased their investments. The overall inflow was considerably smaller then the industry's outflows.
Hedge funds bet on or against stocks, bonds, or other securities. Their capital typically comes from borrowed money, and hedge funds charge a substantial premium for their service. The exiting insurance companies haven't made much of a dent in hedge funds, which still manage a total of $3.24 trillion.
Lately, the hedge fund market is competing with rival, low cost, passive investment products that track indexes like the S&P 500. And on the performance front, hedge funds have typically returned less then their S&P 500 counterparts.
A widely followed hedge-fund-returns index maintained by data-research company HFR dropped 0.45 percent in June, according to a report released last week. The index rose 0.79 percent in the first two quarters, which was lower than the 2.65 percent return on the S&P 500, including dividends, over the same period.
This declining appetite for risk exposure from large insurance companies has been occurring over the past several years. Back in 2016, MetLife announced it would be shrinking its investments in hedge funds by an estimated $1.2 billion over the next couple of years, declining its holdings from $1.9 billion at the end of 2015 to $637 million as of the end of March 2018.
AIG, an even larger investor in the industry, with an estimated $11 billion in hedge funds at the end of 2015, announced in 2016 that it would nearly half its portfolio, where it currently only holds $5.5 billion in hedge fund investments as of now.
Analysts claim that the main culprit in this decline has been the performance of hedge funds over the years. In first quarter 2018, overall hedge fund performance was volatile, ending in a 0.35% return. The volatility associated with hedge fund investments has largely turned customers away, and with poor returns lately, analysts suspect that this trend of declining from direct investments in hedge funds will continue as clients seek stable returns.
