One of the top hedge funds in Scandinavia is betting only on life and death.
The Stockholm-based hedge fund manager, Resscapital AB, is active in the U.S. market for so-called life settlements, in which retirees sell their life insurance policies to a third party at a discount. The fund only buys policies after an independent medical underwriting to estimate life expectancy, profiting if it turns out to be accurate.
The fund has now been snapping up policies since 2011 and is starting to profit as its sellers are, well, dying.
“The portfolio is aging and that raises the probability for payouts,” said Gustaf Hagerud, managing director of Resscapital, by phone. “Performance last year was a confirmation that our investment strategy is working. We received payouts slightly above expectations.”
The market has been growing in the past years, making it easier to invest, according to Hagerud. The fund delivered a return of 9.9% in 2018, beating the average loss of 3.5% for the Nordic Hedge Index. It targets an annual net return of 7% with low volatility and has achieved an annualized return of 6% over the past five years.
“There’s a J-curve in this portfolio management strategy,” he said. “It takes some time from building a portfolio until payouts occur. So we expect this to continue.”
Resscapital, which manages $117 million for Copenhagen-listed Ress Life Investments A/S, holds more than 200 U.S. life insurance policies from insurers such as John Hancock, Lincoln International and AXA Equitable. The total nominal face value is around $450 million.
The sellers have on average a life expectancy of 12 years at purchase.
“The people who sell to us are older people in good health,” he said. “They don’t need a lot of insurance anymore. It’s easier to get a correct life expectancy estimate of a healthy person.”
Investing in alternative fixed income with the main risk being longevity makes the fund uncorrelated to the stock markets and business cycles. Instead, an acceleration of U.S. inflation poses the biggest risk, according to Hagerud.
“A rise in U.S. government bond yields isn’t a bigger threat,” he said. “The spreads we buy at are very wide. But an acceleration of inflation above expectations will hurt all fixed income except inflation linked bonds. So that’s the biggest risk.”