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The Actuary The magazine of the Institute & Faculty of Actuaries
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BAJ Volume 10 Part III

The latest part of the British Actuarial Journal opens with a guest editorial by Jed Frees. Jed Frees was editor of the North American Actuarial Journal from 2000 to 2004. His editorial is titled ‘No journal is an island’ and focuses on the subject of journals themselves. It includes useful lists of actuarial journals and other selected journals together with their web addresses.

John Caslin’s paper ‘Hedge funds’ serves as a useful summary of the subject. It contains a description of the major types of hedge fund and explains how they can be used to diversify a traditional managed fund portfolio. There is a thorough description of the risks of hedge funds and a list of questions investors might ask potential hedge fund managers. The paper ends by considering funds of hedge funds. The abstract of the discussion at the Faculty contains some interesting theoretical and practical points from both academics and market practitioners.

The next paper is ‘Market-consistent valuation of life assurance business’ by Tim Sheldon and Andrew Smith. Although written in the context of life assurance, the concepts and issues are relevant to valuing other forms of liability and so the paper will be of wide interest. The paper discusses the motivations for market consistent valuations and then addresses a number of practical questions including:

  • Are gilts or swaps more relevant in deriving the risk-free rate?
  • Should implied or historic volatility be used?
  • What to do where market data is sparse or non-existent?
  • Should Monte Carlo simulation or formula based methods be used – or a combination of the two?

The authors also discuss hedging financial risks in with-profits funds. The paper is followed by the comments of the many contributors to the wide-ranging discussion at the Institute.

Hong-Chih Huang’s and Andrew Cairns’s paper ‘Valuation and hedging of limited price indexed liabilities’ represents the fruits of a research grant from the Faculty and Institute. It considers the optimal static and dynamic hedging strategies for LPI liabilities using cash, and long-term fixed interest and index-linked bonds. The strategy for LPI liabilities is derived as a combination of the strategies for fixed 5% increases and for RPI increases. The paper contains both the theoretical derivation of the optimal portfolios and also numerical results in tabular and graphical form. It also contains some pointers for further research in this to-date little investigated area.

Abstracts of papers from actuarial journals worldwide allows actuaries to keep informed of research further afield – all of the papers listed are available from the profession’s libraries.

The part closes with a memoir of Peter Moody containing interesting details of his position as one of the most powerful investment managers in the City during the 1970s. It records how over lunch various insurance companies agreed to stage a concerted show of confidence. This turned the market round and within two months the FTSE index had doubled.