Jack Meskunas, Oppenheimer & Co
4 January 2021

Captives should consider hedge funds: Oppenheimer

​Insurance companies, and in particular captives, have often struggled to invest in hedge funds  because of the lack of liquidity they offer. Insurance companies need cash on hand at all times to ensure they can cover their liabilities, but investments in hedge funds typically lock money away for months. In some cases investors need to give a year's notice before they can make redemptions.

However, larger captives may be in a position to allocate a relatively modest proportion of their portfolios to hedge funds, said Meskunas.

“Hedge funds have been much maligned in recent years because of their high fees and relatively poor performance but there are good managers out there if you look at track records,” said Meskunas.

“I invest in a hedge fund that invests in global equities with a growth focus and it is up 47 percent this year,” he added. “Even at the bottom of the market it had not lost any money, it has not had a single day in the red this year, because it was hedged using put options on the S&P 500 and a short book. Any captive invested in that hedge fund has not lost a night’s sleep - or a penny of their capital - this year.”

Meskunas believes captives need to look beyond how they have invested in the past and come up with new ideas and fresh thinking to ensure they are maximising returns in their investment portfolios.

“They need to look for managers with specialist styles,” he said. “A good manager is vital. It is not enough to identify the right sector because there is huge variation between companies within a sector. A good manager is better placed to know where the opportunities are than most people working at a captive will be.”

He also urged investors to review their portfolios regularly with fresh eyes, and not to fall into the trap of being needlessly loyal to investments that have been favourites in the past.

Meskunas said: “It is important to know what you own and why you own it. You need to consider this regularly, there is no point in buying and holding blindly, what looked like good value yesterday may not look like good value tomorrow. The investment outlook can change quickly, as the pandemic proved.”