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Abstract:
In this paper we describe life insurance contracts as a portfolio of financial options. This type of policy constitutes the bulk of mathematical reserves of continental European insurance companies. A close examination of a typical contract reveals an exchange of options between policy holders and the Insurance company whereby the former is long a floor option (the minimum guaranteed return) on the fund and short a call on the fund excess return relative to the floor. From an insurance company's point of view, this amounts to holding a portfolio of financial options vis-a-vis the client (the most common types of options included in Insurance contracts are the standard European and cliquet with European exercise options). This framework can be successfully used to support strategic decisions at a firm-wide level: return on risk capital, product design and innovation, risk management, asset benchmark selection and hedging strategies.

Insurance, options, ALM, HPC, linux, cluster

Abstract:
In this research letter we outline the interesting results of the new frontier of interdisciplinary field of behavioural finance and complex interacting systems. Indeed, empirical analysis of financial markets has shown number of stylized facts such as heavy tails or volatility "bursts" which are difficult to explain in terms of evolution of fundamental economic variables. The non-Gaussian, non-stable character of empirical distributions, such as excess demand or stock returns, demonstrate the weakness of any "independent agent" approach to model the real market. Extending the work of Bornholdt and extending the Brock and Durlauf work, we sketch the interest of analyzing stylized toy models of interacting agents whose payoff exhibit both a strategic complementarity with their nearest neighbors actions and an eventual global substitutability with the global market state. This approach may allows a deeper understanding of market dynamics in the quest of potential market inefficiencies to be exploited in Hedge Funds investment strategies.

Hedge funds, investment strategies, simulation, metropolis, dynamic ising, interacting agents

Abstract:
In this paper we try to assess the impact of various policy changes on the ability of the insurance industry to preserve or increase the shareholders' value. As a proxy of the sensitivity of the shareholders value, we measure the sensitivity of ROE (Return On Equities) to three main variables i.e.:

1. different asset allocation strategies (low and high risk investment of segregated funds);
2. different minimum guaranteed returns for policyholders (floor options);
3. cost cutting policy (fixed and distribution costs);

The ROE sensitivity is estimated through a Monte Carlo simulation where, given the actual market conditions, the segregated fund is invested in three total return market indices, and no foreign exchange risk. A 10-year single premium policy, with a reimbursement only at maturity is considered. We show that with a high minimum guaranteed return and the actual prevailing financial market conditions, aggressive investment policies (stocks in excess of 10-15% of total assets) are likely to destroy shareholders' value. Our results indicate that reduction of minimum guaranteed rates and cost cutting are imperative, and an appropriate combination of the two appears to be the best solution.

Abstract:
Hedge Funds are often marketed as appealing alternative investment instruments. The quality of marketing arguments, used to seduce investors, are obviously function of the depth of market literacy of potential investors. In Italy, for instance, high returns, low volatility, and essentially no correlation with market indices, suffice to ease Investment Advisers task to seduce institutional investors with the potentially mined field of HF. Indeed neglecting the proper characteristics of HF instruments and extending with no precautions standard text book models and techniques like Markovitz portfolio optimization, may hide an unexpected risk. The risk of a sudden phase locking of the hedge fund investment with an extreme negative market move, thus amplifying the losses. Indeed, the full construct of Markovitz portfolio optimization is based on the hypothesis on normal multivariate joint distribution of the components. Only in this case the knowledge of the return, variance and correlation suffice to characterize the risk profile of the investment. However, even assuming Markovitz assumptions satisfied, zero correlation is extremely difficult to measure since blurred by measurement errors. Moreover the available data is extremely reduced to allow a satisfactory estimate of the parameters and any implied approach do not seems to be a feasible approach.

It is thus important to understand how and to which extent the information embedded on the HF historical data bases can be used to build an efficient portfolio.

In this article we will expose the problem of measuring correlations and how methods borrowed from theoretical physics, such as random matrices (Wigner 1960), can be used to noise undress raw correlation matrices. Cleaned correlation matrices are then visualized in the subdominant ultrametric space through their Minimum Spanning Tree representation in order to classify, via a similarity measure, funds in homogeneous clusters of management styles. In this case, assuming elliptic joint distribution of the returns, we will complete the portfolio diversification concept by maximizing dissimilarity of the fund managers investment style.

Hedge funds, portfolio optimization, correlation, advisers, diversification

Abstract:
Minimum market transparency requirements impose Hedge Fund (HF) managers to use the statement declared strategy in practice. However each declared strategy may actually lead to a multiplicity of implemented management decisions. Is then the actual strategy the same as the announced strategy? Can the actual strategy be monitored or compared to the actual strategy of HF belonging to the same announced class? Can the announced or actual strategy be used as a quantitative argument in the fund of funds policy? With the appropriate metric, it is possible to draw a minimum spanning tree (MST) to emphasize the similarity structure that could be hidden in raw correlation matrix of HF returns.

Hedge Funds, Selection, Correlation, Random Matrices, Graphs, Taxonomy, Classification, Strategies, CTA,Global Macro

Abstract:
Profit margins on endowment policies offered by European life insurers have been declining in recent years, due to a combination of low inflation and low bond yields. This is because these profit margins are a positive function of the gap between the risk-free rate and the minimum guaranteed return provided to customers. Our aim is to show that proper valuation of contingent claims implicitly embedded in traditional life insurance products can allow firms to manage more asset risk efficiently and become more competitive in terms of returns. Our framework, grounded on a thorough analysis of traditional life insurance contracts, can be used to support strategic decisions in a firm-wide context.