September 2012 Bermuda Re/insurance
59
The road less travelled
Wellington Management
Re/insurers are considering alternative paths to diversifying investment risk and improving returns. Adele Kohler and Conor McCarthy explore the options.
I n today’s low-yield environment, re/insurers are fi nding it
diffi cult to meet their return targets, particularly with investment portfolios typically dominated by investment-grade fi xed income securities. At the same time, re/insurers are seeking to diversify portfolio risk profi les away from undue concentration in credit risk, stemming from sizeable exposures to fi xed income credit sectors and equity market beta.
As a result the industry is paying increasing attention to alternative
investment strategies, such as hedge funds, as a potential path to higher returns and improved risk diversifi cation. Here we examine a wide range of hedge fund styles and their potential fi t within an overall hedge fund allocation. In particular, we highlight the important distinction between total-return and absolute-return funds and offer pointers for creating a well-diversifi ed hedge fund allocation.
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