New trend a reaction to federal rulings: Mutual funds that hedge edging into VA market
Mutual funds that use hedging strategies are finding their way into variable-annuity subaccounts - a move some expect will snowball in the coming year.
“It’s definitely an emerging trend,” says Lisa Plotnick, director of variable-annuity research at Financial Research Corp. in Boston.
“I expect it to be picked up by other companies. This will be a growth area within the VA industry.”
A number of investment firms have either filed or launched hedgelike mutual fund clones for the variable-insurance market, according to Ms. Plotnick, who wrote a September report on the topic.
The long and short of it
Gartmore Global Investments Inc. in Conshohocken, Pa., a subsidiary of Nationwide Financial Services Inc. in Columbus, Ohio, recently launched a long-short funds for the insurance market.
Tremont Capital Management Inc. in Rye, N.Y., recently announced that it is developing a line of hedging products for its affiliate, Massachusetts Mutual Life Insurance Co. in Springfield.
Also, Van Eck Global launched its Worldwide Absolute Return subaccount in May. “Mutual funds with absolute-return or hedge fund types of styles are likely to be included in annuity contracts going forward,” says the New York money manager’s president, Jan Van Eck.
The firm has about $400 million in alternative-investment vehicles.
Up until now, insurance companies made limited use of pure hedge funds, offering them primarily in private-placement variable-universal-life products.
“There was some uncertainty as to what the future of hedge fund investing in VAs was going to be, so many companies were holding off,” explains Ms. Plotnick.
Then, in July, the Department of the Treasury made rulings that dealt a blow to the use of traditional hedge funds in variable annuities.
The rulings, which reiterate earlier positions by the Internal Revenue Service, said that since investments such as hedge funds or separately managed accounts are privately owned, the annuity would lose its tax-deferred status if used, says Ms. Plotnick.
Send in the clones
However, hedgelike mutual funds are clearly allowed, which leads her to believe that more investment firms will start offering clones for the variable-annuity and variable-life market.
Currently, there are about 25 companies that have hedge-fund-like offerings, with roughly $7 billion in 65 funds, according to FRC.
Among them are AIM Management Group Inc. in Houston; Gabelli Asset Management Inc. in Rye, JPMorgan Fleming Asset Management in New York and Gartmore Funds.
Firms whose regular funds have a strong presence in VA subaccounts might have a leg up in providing hedgelike funds to insurance companies.
“These firms already have a head start should they choose to expand their hedgelike offerings to the VA world,” Ms. Plotnick states in her report.
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