Responding to hedge funds that are under performing, American International Group (AIG) announced that it will begin pulling out a number of hedge funds. American International Group is presently invested in over 100 hedge funds but plans to cut this number to 50 or fewer.
Enough is enough
In the third quarter of this fiscal year American International Group had somewhere in the neighborhood of $11 billion invested in hedge funds but Chief Executive Officer Peter Hancock‘s presentation on January 26th to investors made it clear that AIG was going to divest in over half(?) of these positions given anticipated volatility increases and the decreasing liquidity in a number of markets.
David Einhorn's Greenlight Capital was down 0.1% for the first quarter, underperforming the S&P 500's 6.2% return. In their letter to investors, which was reviewed by ValueWalk, the Greenlight team said a lot happened during the first quarter even though they made just a handful of changes to the portfolio and essentially broke even. Q1 Read More
“We had a very negative experience in hedge funds said Mr. Hancock. Speaking to AIG’s plans to move money around he said that the shift will “lead to a much better return on risk and especially return on capital.”
Of course, this could be a contrarian “indicator” that hedge funds will do well, since management in general (not AIG specifically) sometimes tends to sell or buy at the wrong time.
AIG hires new investment manager
Hancock, a former J.P. Morgan & Co. employee hired a former colleague at Morgan, Doug Dachille, last July to help him manage the company’s nearly $350 billion investment portfolio. Dachille was given the title of chief investment officer and brings a fresh pair of eyes to the companies massive portfolio.
It’s been seven years on the trot that hedge funds have under performed the S&P 500 index and a number of money managers have had enough with hedge funds for the moment. This includes: BlackRock and other massive money managers. Last week, however, MetLife publicly announced that it would continue to look to hedge funds to manage its money despite poor 4th quarter results. There belief in hedge funds is a long one with MetLife’s Chief Investment Office saying that he will continue to work with them in the future as they are “really concentrating on the managers and strategies that have been the longer-term stronger performers for us.”
AIG refused to go on record with specific amounts that it would be pulling from hedge funds nor which funds it would be dropping. This news should be shared at the company’s next quarterly earnings call.
The belles of the ball seem to be losing their shine in the eyes of many.
Meanwhile the company is still fighting Carl Icahn and has unveiled ambitious plans in an attempt to thwart off Icahn’s pressure for a spinoff.
RBC Capital opines:
We see two main takeaways from management’s updated strategic plan. First, a willingness to refocus the business around a smaller group of products and geographies. To achieve this, they will either seek adequate rates and/or returns or exit the line with appropriate expense reductions back-filling the success (or lack thereof) of this initiative. We think this is a positive step and one that is overdue.
We view management’s target of 6 points of margin in the P&C business as ambitious, in a weakening pricing environment, without significant loss of business. A two-year time line is also ambitious, as business repositioning efforts are highly iterative, so it could be deep into 2017 or even 2018 before margin benefits are visible.
Our second takeaway was the split of the business into an “Operating” and a “Legacy” portfolio. This isn’t quite a “good bank-bad bank” bifurcation and it does not absolve management from achieving returns on the whole bundle, but it should focus attention on what’s working and what’s not and provide something of a road map for which businesses can be a source of long-term earnings and which are queued for one-time monetization. The fact that 40% of equity can be regarded as “Legacy” and will either liquidate or divest over a period of years should give some indication of the scope of change that AIG is undertaking and why we view the plan as ambitious.