Question #35
Reading: Reading 34 Hedge Fund Strategies
PDF File: Reading 34 Hedge Fund Strategies.pdf
Page: 14
Status: Incorrect
Correct Answer: B
Your Answer: C
Question
The key factors an insurance settlements portfolio manager must successfully analyze include:
Answer Choices:
A. the underlying interest rate on the policy, the early termination provisions of the contract, and the government bond yield curve
B. expected policy cash flows, ongoing premium payment obligations, and the eventual death benefit to be received
C. the probability that the insurance company will face financial pressure, the demeanor of the policy holder, and the age of the policyholder. Bobby Berg is an investment analyst at Conduit Asset Management (CAM), a manager of a large fund of hedge funds. Berg is performing research into investments relating to catastrophe reinsurance and life settlements, a relatively new sector for hedge fund investment. Berg meets with Michael Stern, a hedge fund manager who specializes in investments in the insurance sector. Stern discusses recent life settlement opportunities presented by insurance brokers and discusses their relative merits, the details of which are displayed in Exhibit 1. Exhibit 1: Selected Life Settlement Opportunities Insurance Pool Surrender Value ($m) Annual Premium (Percentage of Benefit) Life Expectancy of Pool vs. Mortality Tables
Explanation
Insurance settlement managers must be able to create a discounted cash flow analysis of
all future cash flows. Continuing premium payments owed, buyout terms for existing
holder, and eventual death benefits to be received at an uncertain point in the future are
key factors they must consider.
(Module 34.3, LOS 34.f)
Bobby Berg is an investment analyst at Conduit Asset Management (CAM), a manager of a
large fund of hedge funds. Berg is performing research into investments relating to
catastrophe reinsurance and life settlements, a relatively new sector for hedge fund
investment.
Berg meets with Michael Stern, a hedge fund manager who specializes in investments in the
insurance sector. Stern discusses recent life settlement opportunities presented by
insurance brokers and discusses their relative merits, the details of which are displayed in
Exhibit 1.
Exhibit 1: Selected Life Settlement Opportunities
Insurance
Pool
Surrender
Value ($m)
Annual Premium
(Percentage of Benefit)
Life Expectancy of Pool vs.
Mortality Tables
A
10.4
0.95%
Longer
B
9.2
0.87%
Shorter
C
12.8
1.25%
Shorter
Berg is performing due diligence on hedge fund managers that could potentially be added to
the existing fund of hedge funds portfolio. She is aware of a recent motion passed at an
investment committee meeting, which recorded the following short-term tactical objectives:
Increase liquidity
Decrease leverage
Lower exposure of the fund to tail risks, such as acute credit weakness in markets
Berg considers how best to achieve these objectives when considering the existing style
allocation of CAM.
CAM provides the following information on its fee structure to potential clients:
CAM charges 1% management fee and 5% incentive fee
The average underlying fund charges 1.5% management fee and 17.5% incentive fee
A client of CAM asks Berg about the relative merits of a fund-of-funds structure versus a
multi-manager hedge fund structure. They are specifically interested in which structure
would give the best result for investors, with respect to the following:
Operational risk
Speed of tactical asset allocation
Fee netting risk