Goldman Pitches Hedge Funds to Insurers After AIG Scales Back

  • Hedge funds still right bet to diversify holdings, Siegel says
  • Goldman also suggests low-volatility equities, private assets

Goldman Sachs Group Inc.’s Mike Siegel, who oversees about $190 billion at the bank’s asset management arm, said insurers should consider adding to hedge fund holdings, even after such investments slumped, to help diversity portfolios comprised mostly of low-yielding bonds.

“Companies have tremendous capital, they need to find places to put it to work,” said Siegel, the head of insurance asset management, discussing results of the bank’s annual survey in the industry, dated Wednesday. “They don’t want to put it to work in any one sector.”

Hedge funds can be a tough sell for Wall Street after they underperformed the Standard & Poor’s 500 Index for seven straight years. American International Group Inc. decided this year to exit at least half the hedge funds in which the insurer invested, with Chief Executive Officer Peter Hancock lamenting a “very negative experience.” New York City’s pension for civil employees voted this month to exit its $1.5 billion portfolio of hedge funds, determining that the investments didn’t perform well enough to justify high fees.

Still, UBS Group AG boosted its recommended allocation to hedge funds for the second time in two years, saying the strategy will provide stability. And Siegel said investors shouldn’t be discouraged by the recent slump.

‘Undue Concentration’

“Part of it is to be thoughtful and selective about which hedge funds you’re in, and making sure you have a diversified portfolio,” he said. “When you take a look at insurance companies that have gotten themselves into trouble for the last decades, it’s been undue concentration in a single asset class that then went bad.”

In addition to hedge funds, Siegel’s operation identified three other types of holdings that can help insurers as central bank policies globally continue to push down bond yields. One strategy involves low-volatility equity investments. Another, which could apply to insurers in other nations, is to buy bonds denominated in U.S. dollars, and hedge the securities against currency fluctuations. Finally, the companies can look beyond public markets, betting on real estate, private equity or lending, which has become increasingly popular among insurers.

AIG, which was stung in the financial crisis by huge bets on residential mortgages, started a venture with a private equity firm in 2014 to make loans to medium-sized companies. CNO Financial Group Inc. said this week that it would invest $250 million with Tennenbaum Capital Partners, including a bet on direct lending.

‘Willing Lender’

“The industry is a very willing lender,” Siegel said of insurers. “One, they have tremendous liquidity and they’re willing to invest that liquidity in private assets. But second, we see commercial banks in many different parts of the world reducing the amount of lending they’re willing to make” under tighter capital rules.

Insurers globally are more optimistic about investment opportunities than a year earlier, according to Goldman Sachs’s survey of 276 executives. Their greatest concerns include a possible economic slump in the U.S. and slowing growth in China, along with volatility in credit and equity markets.

Insurance money managers who are bullish on the the world’s largest economy should expect junk bonds to perform well, Siegel said.

“On the other hand, if you’re concerned that the U.S. is slowing down, potentially touching a recession; Europe has been flat-lined potentially heading into recession; and maybe China’s going to have a really hard landing, then you’re probably looking at a credit market that probably freezes up with significant defaults,” Siegel said. “Then high-yield is not the place you want to be.”

More than three-quarters of the executives said the credit cycle is in a late stage, marked by “deteriorating quality,” according to the survey. Just 33 percent gave the same answer a year earlier.

Before it's here, it's on the Bloomberg Terminal.