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Americans living longer is biggest risk for Nordic hedge fund
[OSLO] In a time of negative interest rates, you sometimes have to stretch far to find some decent returns.
The Stockholm-based hedge fund manager, Resscapital AB, is turning to an alternative but fast growing market of betting on life insurance policies of retired Americans. Its aim is to deliver returns of as much as 8 per cent a year from a market that's largely uncorrelated with other assets, providing a good hedge to gyrations in stocks and bonds.
"This is a product with a fundamentally different risk," Gustaf Hagerud, the fund's managing director, said in a phone interview this week.
Resscapital manages a relatively modest US$87 million, but it's part of a big market of so-called life settlements, in which retirees sell their policies to a third party. With an aging population this secondary market is expected to grow in the US and has attracted investors such as Fortress Investment Group.
Conning & Co, a research company, in 2014 estimated that the market could reach US$180 billion by 2023, according to an industry association, though legal concerns over insurers cancelling policies have put a damper on growth in the past.
Resscapital, which manages the fund for Copenhagen-listed Ress Life Investments A/S, oversees about 210 US life insurance policies from insurers such as John Hancock, AXA Equitable and Lincoln International. The sellers are at purchase on average 78 years old with a life expectancy of 12 years.
The nuts and bolts of this type of investing is calculating life expectancy correctly. The longer an individual lives, the more in premiums will need to be paid. But it's easier, and less risky, to buy policies from healthy individuals.
"If you're a healthy 78-year-old, you can't get healthier than healthy," Mr
"We never buy from persons that have known diseases. This makes it easier to make a correct statistical analysis of the insurance. We don't want to buy from persons who are likely to be in need of the life insurance."
Resscapital targets a return of 6 to 8 per cent per year over a 10-year period. The realised volatility has been 3.5 per cent. The return in 2016 was 2.7 per cent and the return through April this year is 6.2 per cent.
"If we can deliver a net return of 7 per cent per year with a 3.5 per cent volatility the risk-adjusted return will clearly be very competitive," said Mr Hagerud, 53, who earlier worked for Kestrel Investment Partners in London and Swedish pension fund AP3.
As relatively wealthy baby boomers retire in the US more and more life insurances are likely to end up in the secondary market. Resscapital pays 20 to 25 per cent of face value and help to solve a "considerable cash flow problem", according to Hagerud.
"From a cash flow perspective, selling the policy is a good alternative for retirees," he said.
"We help to clear a market. We pay about six times more than surrender value."