As we’ve seen during the past two years, investors can turn their backs on sluggish asset classes such as equities or real estate. While traditional investment strategies have produced lackluster returns recently, there has been a growing interest in alternative asset classes. Investors have placed renewed focus on portfolio diversification and are enticed by the more predictable returns offered through life settlement investments. However, this new found attention raises other questions about the suitability of life settlement investments for various investors. In an industry dominated by institutional investors, are these investments appropriate for retail investors?
More than ever before life settlements are accessible to all types of investors. With online services like the new Life Settlement Investments Finder, it is now easier than ever for retail investors, family offices and institutional investors alike to make investments in the asset class. Online services such as these, match investors’ profiles against a query of known viatical investment choices. By default these services make life settlement investments available for everyone from the institutional investor and to the mass affluent.
Although there are now a number of ways to participate as a retail investor, most high net worth individuals are not offered alternative investments by their advisers. In fact, many broker dealers prohibit their representatives from even selling or discussing life settlement investments. For those that do decide to pursue the opportunity, a myriad of choices abound. One could invest in this asset class by buying; individual policies, fractionalized shares of policies, positions in dedicated life settlement investment funds or even shares of hedge funds with activity in the space. Each strategy has its own level of risk & reward and necessitates a different degree of sophistication as an investor.
Most investors are accustomed to the high level of disclosure provided by investment products such as mutual funds. Retail investors must understand, and be comfortable knowing, that the same level of transparency is not available with all types of life settlement investments. They must accept that, even in this age of 24 hour a day information saturation, there is a certain level of insulation between a retail investor of an investment fund and an insured.
In addition, retail investors must understand that direct or fractionalized ownership of policies are an illiquid position. A policy can’t be bought or sold instantaneously like a stock. That means investors exiting an investment prior to maturity will incur high transactional costs and cycle times. Life settlements should be approached with a buy and hold strategy requiring a timeline measured in years, not weeks or months.
With more prominence as an investment strategy, life settlement investments are also getting more scrutiny. Critics argue their complexity, risk and opaque nature should be avoided by all but the most capable institutional investors. Well capitalized investors have the benefit of being able to build homogenous portfolios that are statistically predictable and reduce the overall extension risk of individual insureds. Building and maintaining a portfolio of insurance policies is an involved process and takes a serious commitment. The capital required to execute the compliance, due diligence and acquisitions is usually only available to institutions. However, just because smaller investors can’t undertake the same initiatives doesn’t mean they are precluded from the asset class altogether.
As long as retail investors are aware of the risks and unique nature of the space, there is no reason that they shouldn’t enjoy the benefits of life settlement investments. When done correctly, the investment strategy offers an uncorrelated asset class that generates predictable long term returns. The key as with any investment, is to ensure the proper product is chosen and strategy employed.
Please visit Christian Evulich’s technorati column for more information about life settlement investments.
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