EUROPE - Institutional investments in hedge funds and other alternatives assets classes could come under threat by the Solvency II directive, French business school Edhec has claimed.
Within a Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) preamble to the Solvency II supervisory standard, all alternative investments are subject to a capital charge of 45% - nearly 50% higher than the 32% applied to regular equity exposures - according to Edhec in a position paper.
The business school claims this capital charge is totally inconsistent with the real risk profile of hedge funds, while arguing CEIOPS has "probably succumbed to some of the most widespread fears about hedge funds, which are often accused of leading to systemic risk".
An Edhec spokesman told IPE today: "Any investment comes with some risks, the issue is what risks do you want to be exposed to. We have notably shown that over the last 10 years the S&P500 [an index containing the stocks of 500 Large-Cap corporations] is more volatile than the hedge fund industry."
The school believes hedge funds deliver good so called beta-benefits, meaning they are very useful for diversifying a portfolio.
"We don't think it is a good idea to invest in hedge funds for their alpha-benefits, which is what they became known for, their absolute return aspect. We think the fact that they are exposed to different risks than stocks and bonds means that they are very useful as diversifiers," the spokesman said.
Edhec has urges CEIOPS to correct its proposals as it believes it will otherwise be "practically impossible for European insurance companies to continue to invest in hedge funds".
The school made these comments in its latest position paper, a reaction to the equity risk sub-module of CEIOPS' Quantitative Impact Study (QIS) 3, which will form the basis for the conduct of QIS4 and the last study, QIS5.
The European Commission have mandated CEIOPS to carry out these studies before the final text of the Solvency II directive is drafted.
CEIOPS said its QIS3 report is still being drafted: "We are running QIS3 for the moment and we are open for any comments. We'll see what impact this calibration may have on the QIS3 outcome."