Should Life Insurance Companies Invest in Hedge Funds? Thomas Berry-Stölzle, Hendrik Kläver, and Shen Qiu Discussion by Monica Marin Ph.D. Candidate, Finance University of South Carolina

Objective to Investigate:  Should life insurance companies invest in hedge funds? How much to invest? Impact of insurer’s characteristics:  Liability Structure  Capitalization  Restrictiveness of Accounting System

Summary  Model: a life insurance company offering contracts with a cliquet-style interest rate guarantee  Extension to Kling, Richter, and Ruβ (2007), by incorporating 3 correlated AR(1) GARCH(1,1) processes  Monte Carlo Simulations for different asset allocation strategies  Calculate Markowitz efficient frontiers

Findings  Benefits from investing in hedge funds: Expected portfolio return is increased Portfolio volatility is reduced  Benefits are greater when: The interest rate guarantees are higher Insurer’s capital is lower  Higher expected returns in the case of event-driven hedge funds

Comments & Suggestions  Provide some statistics on the actual investment in hedge funds by life-insurance companies  Explain why you are generating the correlated AR(1) GARCH(1,1) processes  Striking result: high percentage of hedge funds (70%-90%) in the portfolio!

Table 2

Mean Return & Std. Deviation (Convertible Arbitrage)

Comments & Suggestions (Cont.)  In addition to the survivorship bias, also acknowledge the backfill bias (Malkiel & Saha (2005))  Hedge fund returns have on average a relatively low standard deviation. Report additional moments (skewness, kurtosis) in Table 2.