The Netherlands Authority for the Financial Markets (AFM) granted Milliman Financial Strategies B.V. (MFS) a licence for investment services at the end of 2020 (Article 2:96 of the Financial Supervision Act). MFS, with an execution platform in Chicago, London, Amsterdam and Sydney, manages financial balance sheet risks of pension funds and insurers worldwide. In 2018, due to the approaching Brexit, it was decided to serve the European clients of MFS from Amsterdam in addition to London. With the licence granted, MFS can continue to manage financial balance sheet risks for Dutch financial institutions, including pension funds.
“The asset management market is changing rapidly and is under pressure from increasing competition and regulation, resulting in lower management fees and higher costs. Since its inception in 1998, Milliman Financial Strategies has invested in state-of-the-art technology to provide its clients with effective, efficient and transparent hedging solutions. As a result, we are well positioned for these changes in the asset management market,” said Marcel Kruse, Director at Milliman.
“For many years, Milliman Financial Strategies has been helping financial institutions in the United States, Canada, Europe, Australia and Japan to manage market risks on their balance sheets. We are delighted to add our Amsterdam office to our global trading platform and offer our tailored hedging solutions to Dutch pension funds,” said Sam Nandi, Principal and Managing Director at Milliman.
“Milliman’s hedging and overlay solutions stand out from existing providers because we combine the innovative and solution-oriented approach of our consultancy practice with a robust in-house developed system architecture and enrich it with our actuarial knowledge and expertise, including that of Dutch pension funds and pension schemes,” said Rajish Sagoenie, Principal and Managing Director at Milliman.
Milliman is pleased to announce that it has chosen MatchingLink software to enhance its hedging and overlay solutions. With technology playing an increasingly critical role in every part of the investment cycle, Milliman recognizes the need to accelerate the development of digital solutions to ensure competitive hedging solutions offerings to its clients.
The Milliman-MatchingLink collaboration brings together deep skills in both business and technology to support Milliman’s clients and create more value. ‘With MatchingLink’s next-gen tech solutions we can add significant value to our hedging and overlay solutions and drive better results for our (pension fund) clients,’ says Rajish Sagoenie, Principal and Managing Director for Milliman, The Netherlands.
‘The seamless integration of MatchingLink software within the Milliman MG-Hedge® platform, combined with a robust and flexible system architecture, has convinced us that by using MatchingLink we can optimally serve our customers in the Netherlands and Europe. The Milliman-MatchingLink collaboration offers our (pension fund) clients state-of-the-art solutions to manage financial risks now and, in the future,’ says Marcel Kruse, Director Pension and Investment Risk for Milliman in the Netherlands.
MatchingLink’s technology platform operates as a flexible layer, communicating with existing systems. The platform combines a unique data-gathering solution with a calculation engine, analysis and reporting, a flexible workflow solution and artificial intelligence. The platform is both compliant and auditable by design. ‘With our software Milliman can unlock the full potential of the most advanced technology and increase the quality of their business on a daily basis,’ says Eric Pieper, MatchingLink’s CEO.
Traditionally, hedge funds have sought to achieve outsized returns relative to the level of market risk in their portfolios while simultaneously maintaining a low correlation with the market at large. In other words, they seek high alpha and low beta. Proprietary investment strategies and relaxed reporting requirements have helped to make these goals possible, but also aiding the endeavor was a lack of appropriate investable benchmarks against which hedge funds might be measured. However, the emergence of hedge fund replication strategies (subscription required) might help institutional investors to more accurately assess the performance of hedge funds and correctly identify and quantify the components of their returns. Furthermore, hedge fund investors suspicious of the relative value of investing in single funds or funds-of-funds (“I can’t believe it’s not beta”) may now have a lower-cost avenue for accessing hedge fund beta.
Hedge fund replication is the general name for strategies attempting to replicate, or beat, the returns of hedge fund indices using assets that are potentially more liquid and transparent. For instance, a replication strategy might attempt to achieve returns similar to a particular hedge fund index while only investing in equities. Successful strategies would achieve returns very similar to their target indices, creating lower-cost, investable hedge fund beta.
Potential investors should consider carefully before allocating assets to hedge fund replication strategies as there are potential downfalls. First, the replication strategy may or may not perform as expected, meaning that an investor may or may not be able to access hedge fund beta. Second, although fees associated with replication strategies are generally lower than direct investment in hedge funds or hedge funds-of-funds, they are still rather high, typically comprising either a 1% to 2% management fee or a 15% performance fee, according to a recent Pension and Investments article. And finally, investors should consider their goals in making any asset allocation. Hedge funds, or hedge fund replication strategies, may provide diversification, but at a significant cost. Further, if risk management is the end goal, and diversification simply a means for achieving that goal, it is important to remember that diversification relies on correlation and, as correlations vary over time, diversification alone may not prove an effective risk management tool. Focused risk management strategies may be more effective in meeting those goals at a much lower overall cost.