American International Group CEO Peter Hancock is scaling back hedge fund bets as he seeks to improve returns and free up more cash to return to shareholders.
“It's not an efficient use of our capital, so we'll be diminishing our allocation to hedge funds,” Mr. Hancock told Bloomberg's Betty Liu in a televised interview on Tuesday after a presentation in which he announced plans to generate $25 billion over the next two years that can be used for stock buybacks or dividends. “About $2 billion of that return to shareholders is by derisking the asset side of our balance sheet,” he said.
Insurers have long highlighted how alternative holdings like private equity and hedge funds can beat bond markets for companies willing to sit tight during periods of volatility. Part of that strategy has been called into question in recent years as hedge funds struggle while regulators and ratings firms stress the importance of having liquid holdings available to pay claims. AIG generated an annualized yield of just 2.36% in the first nine months of 2015 on hedge funds.
“The assumed returns were between 8% and 10%, historically, and obviously the realized returns over the last three or four years have been greatly disappointing compared to that,” Mr. Hancock told investors.
AIG had about $11 billion allocated to hedge funds as of the third quarter, part of an investment portfolio valued at more than $340 billion. Mr. Hancock hired his former J.P. Morgan & Co. colleague Doug Dachille in July as chief investment officer and expanded his role in December by assigning him to oversee the science group, which uses data to support underwriting decisions.
Private equity was more successful for AIG last year, with an annualized yield of 14.7% on about $7.2 billion of holdings in the first nine months. The insurer committed $1.5 billion toward a lending venture in 2014.