The alternative assets industry has had several years to prepare for the effects of Solvency II, which is now set to be implemented fully in January 2016. It is only now however, that we are beginning to see some key players within the hedge fund industry alter their strategies accordingly, and some exit the asset class altogether.
A noteworthy example is the Norwegian insurance company, Storebrand. Previously, the insurance company has been a large player in the hedge fund space, running its own internal fund of hedge funds operation, through which it gained exposure to a number of underlying vehicles. However, Storebrand recently made the decision to exit the asset class completely, citing the proposed 49% capital charge on hedge funds (part of the Solvency II initiative) as the primary reason behind this move. This proposed charge runs the risk of further institutional investors, like Storebrand, exiting hedge funds as a result of no longer seeing opportunities in the space.
The capital charge for hedge funds was set as high as 49% due to the perceived high level of risk that hedge funds carry in comparison to more traditional asset classes such as fixed income. Although this may deter investments in the asset class, we may see instead that some insurance companies shift their hedge fund structural preferences. Instead of focusing on commingled vehicles, the investors may choose to invest through separate or managed accounts in order to gain a greater degree of transparency and offset the risks associated with the asset class. At present, the majority of European insurance companies (81%) have a preference for commingled fund structures, both direct and funds of hedge funds. Conversely, only 7% currently have a preference for managed accounts – a proportion that may increase in the near future.
Although certain European insurance companies have reduced their exposure to the hedge fund space, Preqin’s data shows that collectively, the investor group’s allocation to the asset class has increased. In 2012, European insurance companies had an aggregate allocation to the hedge fund space of $24bn. This allocation has now increased to $27bn for 2014. Whether these figures will continue to rise remains to be seen as Solvency II becomes a working reality to these investors.