Captives navigate volatility with strategy and smarts

Day two of the Cayman Captive Forum 2025 concluded with a panel on “Investment Risks and Opportunities Amidst Volatility and Changing Global Markets,” featuring Jack Meskunas of Oppenheimer & Co, Hugh Barit of PRP Performa, Reece Jarvis of Butterfield Bank, and Marc-Andre Gaudreau of Jarislowsky Fraser. The discussion highlighted how captives are navigating an investment landscape defined by heightened volatility, evolving interest rate policies, and shifting global markets.

Meskunas opened the session by emphasising the dual considerations for captive portfolios: insurance and market dynamics. “You have to balance economic outlook, interest rates, volatility, and active versus passive management,” he noted, while also stressing the importance of the investment policy statement (IPS) as a “living document” guiding capital preservation, liquidity, and compliance. Meskunas advocated for captives to maintain robust IPS frameworks aligned with both regulatory and operational objectives.

Gaudreau described the IPS as the “Bible” for captives. He stressed that capital preservation is paramount, with liquidity as a secondary priority, and that performance should never overshadow the core insurance purpose. Reece Jarvis added that flexibility within investment guidelines is critical, as market conditions and credit ratings change rapidly, making annual reviews essential.

The discussion then turned to risk and opportunity in the current market environment. Jarvis highlighted potential dangers from abrupt shifts in interest rates, particularly if the Federal Reserve misjudges economic acceleration, which could lead to steep yield curve adjustments. Gaudreau added that, while running yields have improved from historic lows, long-maturity bonds remain risky due to global liquidity imbalances, with specific caution for developed markets. Both agreed that short-duration instruments and hedging strategies remain essential tools for managing reinvestment and interest rate risks.

A significant portion of the conversation focused on Fed policy and interest rate expectations. Meskunas and Jarvis debated the implications of potential rate cuts, noting that futures markets often misprice timing, even if directionally accurate. Gaudreau suggested that while rate cuts are priced in, opportunities exist in five- to six-year maturities with high-quality credit, yielding around 5%, offering a balanced risk-reward profile.

Volatility management was a recurring theme. Barit and Gaudreau underscored diversification, with captive portfolios typically holding 60–80% fixed income to dampen market swings, supplemented by targeted equity allocations. Gaudreau highlighted the use of credit derivatives to protect capital, allowing managers to capitalise on volatility without taking on permanent loss risks.

Finally, private debt emerged as a key area of interest. Both Jarvis and Gaudreau acknowledged the growth of this asset class, filling funding gaps left by stricter banking regulations. While caution remains necessary, the panel saw private loans as a source of enhanced yield, particularly for long-duration liabilities, provided risk is managed prudently.

While markets remain volatile, thoughtful IPS governance, disciplined risk management, and selective deployment across fixed income, equities, and private debt can provide captives with resilient, opportunity-driven portfolios, the panel agreed.

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