EU has got it wrong on solvency levels for alternatives investment – Lyxor
GLOBAL - European policymakers have miscalculated solvency requirements for institutional investment in hedge funds and other alternatives assets, according to Mathieu Vaissié, senior portfolio manager at Lyxor Asset Management.
Vaissié said the current 49% solvency requirement for 'riskier' investments - as stipulated in the Solvency II legislation scheduled to come into force in 2014 - was too high and that lowering it to 25% would be more accurate and prevent institutional investors from pulling out of hedge funds en masse.
Vaissié said: "There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/liability profile efficiently.
"Changes in the regulatory framework and in accounting rules make it even trickier for institutional investors, who now have to rethink their overall investment policy.
"While the benefits of hedge fund strategies in asset liability management have been documented in the academic literature, the integration of these strategies into the global asset allocation of institutional investors may be jeopardised by recent developments on the regulatory front."
Vaissié said the application of an internal-model approach to a series of investable hedge fund indices over a period covering the recent crisis had shown that a solvency requirement of just 25% would suffice for a well-diversified hedge fund allocation.
A capital requirement rate of 49%, however, would impact alternative asset classes "deeply".
"Any prudential rules should be implemented in a coherent way throughout all the asset classes," he said.
"If a 49% capital charge were to be applied to alternative asset classes, institutional investors would likely move towards fixed income, which require much lower requirements.
"As a result, they would have no choice but to take on higher-risk exposure by investing in assets such as Italian or Spanish government debt, as well as high-yield bonds, since they would still need to find a source of return."