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Can Reinsurance Exposure Provide Uncorrelated Alpha?

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Chief investment officers love to talk about finding uncorrelated assets. Sovereign funds and pensions like Australia’s Future Fund, the New Zealand Superannuation Fund and the Pennsylvania Public School Employees’ Retirement System seek risk-adjusted returns, especially if it springs from an uncorrelated source. Insurance-linked securities (ILS) are gaining traction as a viable asset class for institutional investors. Catastrophe reinsurance can provide investors opportunity with taking risk and getting paid for it. Insurance companies like AIG are in the business of serving clients and pricing risk. Often times, these insurers need to offload risk and reduce exposure to potential catastrophes. By having reinsurance, insurers can expand capacity.

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Generally speaking, insurance-linked securities are not fully correlated with the larger financial markets. For institutional investors, a unique mindset is necessary when contemplating ILS strategies. For example, reinsurance loss does not present major upsides. The only news is bad news; investors need to get a grasp on how much they have to pay for bearing downside risk. Fresh investors to the ILS market typically hire an experienced ILS fund manager to access reinsurance exposure. Generating sources of alpha is related to information asymmetry. The fragmented reinsurance market and complex layers of coverage provides pricing differences and market inefficiencies. Experienced ILS managers may have access to relationships and information flow in this opaque market.

Largest Insurance-Linked Fund Managers – Ranked by Name

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Tom Gores Wants Some Credit Game

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Traditional buyout firms are looking at building credit platforms to enhance revenue. Recently, Platinum Equity, a buyout firm run by Tom Gores that was formed in 1995, hired Michael Fabiano to help spur the formation of a credit investing division. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Saudi Arabian Military Industries Forms Venture with Navantia

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State-owned Saudi Arabian Military Industries (SAMI) signed a deal with Navantia, a Spanish state-owned shipbuilding company, to form a joint venture to construct five warships – the building of five Avante 2200 Corvettes. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Katara Hospitality and AccorHotels Eye Sub-Saharan Africa Hotel Market

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Katara Hospitality, a hotel operator and owner unit of the Qatar Investment Authority (QIA), and AccorHotels are taking a bet on the hotel market in sub-Saharan Africa. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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