Institutional investors, including a number of major superannuation funds, have recently made allocations to the Life Settlements Wholesale Fund as a diversification play. The fund ended 2007 with almost $700 million in funds under management, a 632 per cent increase on the year before, with the directors claiming forward commitments will take the fund well over $1 billion in 2008.

Victorian Funds Management Corporation (VFMC), the $41 billion government-owned funds manager, made its first investment (of an undisclosed size) in mid-2007. According to Leo de Bever, VFMC’s chief investment officer, life settlements are attractive because of their lack of correlation with any traditional asset class. Indeed, betting on how briefly a person is expected to live could only be positively correlated – tenuously – with shorting companies making progress in medical advancements.

According to PIR, the likelihood that medical advancements will extend life is one of the major factors likely to negatively impact returns on life settlement funds. Stephen Knott, director at the Life Settlements Wholesale Fund, says that while this is an important consideration, he believes there is a difference between life expectancy – that is, the age one can be expected to live on account of one’s social and environmental circumstances – and longevity, that is, the maximum age a human being can reach under ideal circumstances (around 120 years). “Human longevity has not changed over the past 100 years,” Knott says. “Only the number of people who reach that age has changed.” Even if there is impact from medical advancement, it won’t be dramatic. “We try to be as conservative as possible. The average age of our policy holders is 80 years, so there is not much room for downside.”

Dominic McCormick, chief investment officer at Select Asset Management, says that while life settlement funds look ideal on the surface, without the right structure the projected returns could be easily undermined. For example, the Life Settlements Wholesale Fund purchases policies sourced in the US, but does not hedge its currency exposure. While an institutional investor may have no trouble balancing this risk, a retail investor purchasing what appears to be a low-risk proxy for fixed interest may in fact end up bearing a lot of volatility, McCormick says.

The slide of the US dollar combined with the surge in the Aussie currency toward the end of 2007 was a prime example of just what could go wrong, he believes. During 2006/07 the Aussie dollar increased 14.5 per cent against the greenback, reducing capital growth in the Life Settlements Wholesale Fund’s $A units to 4.69 per cent, while the $US units enjoyed growth of 19.92 per cent.