Insurers Pull Back From Hedge Funds
July 24 2018 - 1:45PM
Dow Jones News
By Mengqi Sun
Wall Street money managers are having problems hanging onto
insurance companies as customers.
American International Group Inc. and MetLife Inc. pulled more
than $700 million from hedge funds in the first quarter of 2018,
according to filings. That followed billions of dollars in
withdrawals over the previous two years.
Net hedge-fund outflows from all U.S insurers amounted to $8.7
billion in 2016 and 2017, according to a new report from ratings
firm A.M. Best Co. Total insurance-industry assets held by hedge
funds were $16.4 billion at the end of 2017, down 8.5% from the
same time a year earlier.
Six other insurers beyond AIG and MetLife also reduced their
holdings in 2017, according to A.M. Best. Twelve insurers,
including Prudential Financial Inc., added to their investments,
but those inflows were collectively smaller than the industry's
outflows.
Clients pulled a net $70 billion from hedge funds in 2016,
according to research firm HFR, before adding back roughly $10
billion in 2017. Through the first six months of 2018 they have
pulled another $2 billion.
However, the hedge fund industry is in no danger of running out
of customers: The managers still oversee a total of $3.24 trillion,
according to HFR. Hedge funds typically bet on or against stocks,
bonds or other securities, often using borrowed money and charging
hefty fees.
Since the latest financial crisis, the funds have struggled to
do better than low-cost, passive investment products that track
indexes such as the S&P 500.
"Many hedge funds have been challenged on the performance front
and hedge funds also attract the same capital charges as private
equity and other equity products that have achieved higher net
returns," said MetLife Chief Investment Officer Steve Goulart in an
email.
A widely followed hedge-fund-returns index maintained by
data-research company HFR dropped 0.45% in June, according to a
report released last week. That pulled down the industry's gains
for the first half of 2018. The index rose 0.79% in the first two
quarters, which was lower than the 2.65% return on the S&P 500,
including dividends, over the same period.
MetLife initiated its retreat in early 2016 when it announced it
would shrink its investments in hedge funds by an estimated $1.2
billion over the next couple of years. Its holdings dropped from
$1.9 billion at the end of 2015 to $637 million as of the end of
March 2018, according to its filings. That included a $6 million
withdrawal during the first quarter of this year.
AIG was an even bigger investor, with $11 billion in hedge funds
at the end of 2015. It said in 2016 it would cut the portfolio in
half. The insurer pulled approximately $3.2 billion in 2016 and
$2.4 billion in 2017, according to its filings. In the first
quarter of this year it took out another $700 million, leaving it
with $5.5 billion.
AIG's net investment income during the first quarter dropped
27.3% as compared with the same period a year earlier. It said the
lower net investment income reflected, among other factors, lower
hedge-fund performance in the first quarter.
(END) Dow Jones Newswires
July 24, 2018 13:30 ET (17:30 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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