Tax-Efficient Hedge-Fund Insurance Wrappers Hit The Street Running

by Carla Johnson, Investors Offshore.com

02 October 2001

Hedge funds, once the preserve of rich investors and their private wealth managers, have infiltrated most of the world's highly regulated markets by now through schemes that re-package them as listed share investments, giving innocent employment to hundreds of lawyers in the process. As volumes have grown, so minimum investment levels have fallen, putting hedge fund investments within the reach of only modestly well-off people and contributing to the mushroom growth of the hedge-fund sector.

Now hedge funds have penetrated the inner sanctum of the regulated investment world - insurance - through a previously arcane instrument known as private placement variable life insurance. This combines a death benefit with a savings account that can be invested in a variety of ways. At this stage, minimum investments are still high (in excess of $1m) reflecting the costs of those hundreds of lawyers, but it's only a matter of time before this new instrument generates enough volume for smaller units to be marketable.

The attraction of these variable life insurance products is that, if properly structured for the geographical market concerned, investment gains are free of income taxes if the policies are held until death and, in many cases, policyholders can also take distributions in the form of withdrawals and loans tax-free.

These products first emerged in the US, where substantial volumes are already being written. Mass Mutual Financial Group told the Wall Street Journal that wealthy investors with traditional investments in other parts of their estates often want to consider alternatives such as hedge funds when it comes to life insurance. The company expects to be able to do business worth several billions of dollars in this area, and is set to acquire hedge-fund consultant Tremont Advisers, which among its other activities provides insurance companies with portfolios of hedge funds to sell inside variable life policies and annuities.

European equivalents are only just now beginning to emerge. In the last few years there has been considerable growth in the use of insurance 'wrappers' for investment fund products, often using an offshore base, but such arrangements vary widely in structure according to the tax regime in different countries, and it is only now that the available investment volumes are beginning to justify the cost of making the hedge fund connection. But expect to see rapid growth in the near future as European investors and their advisers become more sophisticated.

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