Asset Allocation Volatility Multi-Asset White Paper

Decoupling from Volatility

A New Path for VA Risk Management

Oct 21, 2021
2 min read
Stepping stones stretch across shallow waters as distant mountains loom

What You Need to Know

Our analysis of recent performance struggles in variable annuity (VA) risk-managed platforms reveals an overwhelming concentration in volatility-targeting solutions. But the challenge also highlights a path to enhancing diversification in risk-managed platforms—with a solution that decouples from volatility targeting.

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US$150 Billion
In risk-managed solutions analyzed by AB
to understand drivers of performance across market cycles
80%+
Of risk-managed solutions
ended up in bottom two performance quartiles for trailing five-year returns
1.21
Risk/return ratio for enhanced risk-managed solution
versus 0.94 for traditional 60/40 strategy
Authors
Daniel Loewy, CFA| Chief Investment Officer and Head—Multi-Asset and Hedge Fund Solutions
Marshall C. Greenbaum, CFA, ASA| Multi-Asset Risk Solutions

Executive Summary

Risk-managed solutions are a compelling proposition for VA providers’ investment platforms, offering the potential to control volatility and improve policyholders’ long-run wealth accumulation while also enabling insurers to better hedge long-term liabilities. Given this appeal, the dramatic growth in this category since the global financial crisis (GFC) comes as no surprise.

However, many risk-managed solutions have struggled in recent years, posting disappointing returns. To understand what happened, and how insurers might be able to further enhance risk-managed platforms, we conducted a proprietary analysis of a large sample of risk-managed solutions. It’s a cohort that spans nearly 160 unique strategies with nearly $260 billion in assets under management.

Our work identified a widespread reliance on recent realized or implied volatility levels as inputs to determine the equity allocation. This has caused many risk-managed solutions to be sluggish when re-risking in a new market regime that features rapid sell-offs and fast recoveries—often with still-elevated volatility.

Identifying the source of the issue also points to a solution: designing a risk-managed solution that decouples risk management from volatility management. Incorporating underlying asset prices as an allocation input instead of volatility enables more dynamic equity-allocation responses that can capture a greater share of equity market rebounds. Cost-effective option exposure and fixed-income duration extension can also help reduce the impact of large drawdowns.

This new approach aligns with insurers’ approach to hedging long-term liabilities, effectively acting as a synthetic hedge. It also happens to possess the attributes of an effective investment strategy that won’t impair policyholders’ wealth-accumulation plans and that demonstrates attractive risk/return characteristics. Because no risk-managed solution wins all the time, incorporating this solution can further diversify VA risk-managed platforms, improving outcomes for VA providers as well as policyholders.

Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Daniel Loewy is Chief Investment Officer and Head of Multi-Asset and Hedge Fund Solutions. He oversees the research and product design of the firm’s multi-asset strategies, as well as their implementation. In addition, Loewy is Chief Investment Officer for Dynamic Asset Allocation, and is responsible for the development and investment decision-making for that service. He is also a member of the Real Asset Investment Policy Group and the Target Date Investment Oversight team. Loewy previously led the Wealth Management Group’s research on the major investment issues faced by our highest-net-worth clients, including asset allocation, alternative investments and tax management. Prior to that, he was a research analyst in the equity research department, where he followed the aerospace and defense and capital goods sectors. Additionally, Loewy has served as an associate portfolio manager for our value equity services. He holds a BS in industrial and labor relations from Cornell University and an MBA from Columbia University, and is a CFA charterholder. Location: New York

Marshall C. Greenbaum is a Senior Vice President at AllianceBernstein within the Multi-Asset Risk Solutions Group. Prior, he founded AnchorPath Financial, which was acquired by AB. Greenbaum was a managing director of Swiss Re Capital Markets in the Equity Derivatives Group, a role he also held at Société Générale Corporate & Investment Banking (SG). Prior thereto he served as a senior vice president at Constellation Financial Management, a boutique that SG acquired, and as a senior manager at Ernst & Young in its consulting practice focused on financial risk management. Greenbaum started his career with Buck Consultants, a pension consulting firm. He holds a BS in economics and mathematics from SUNY Binghamton. Greenbaum also holds an Associate of Society of Actuaries (ASA) designation and is a CFA charterholder. Location: New York