In the quest for uncorrelated returns, Cayman-registered investment house Managing Partners Limited is singing the praises of traded life policies, an asset class linked to the life insurance market that it says makes money even while stocks and bonds suffer.

Traded life policies, or TLPs, make money through the purchase of US whole of life insurance policies that are sold, at a discount to their face value, by their holders before maturity. This typically happens because policyholders want to unlock the cash early, as in the case of a terminally ill person. The market has developed in recent years. (To view a related article, click here).

MPL says its Traded Policies Fund was negatively correlated to both equities and bonds over the last five years whenever the latter suffered substantial downturns, according to the research. For example, the fund was correlated by -35 per cent to equities over the five years to 1 May 2011 and by -45 per cent to bonds over the year to that date. This means that if equities fell by 1 per cent, this would be matched by a 0.35 per cent gain in TLPs, and vice versa. When two markets move in perfect lockstep, the correlation is 100 per cent, and when negative, -100 per cent. 

The time period for the study is significant, as it covers the credit crunch bear market when equity markets were extremely volatile, MPL says.

The wealth management industry is seeking uncorrelated returns as part of a measure to diversify risk and protect wealth. In the 2008 market meltdown, many different assets and funds, such as hedge funds, fell in unison as general investment sentiment was hit. The desire for such low or negative correlation returns has driven demand for gold, for example. 

“Over the last one and three years, the correlation is 0.89 and 0.68 respectively, showing that when equity markets delivered positive performance the correlation was stronger,” it said in a note.

In its study of the data, MPL noted similar negative correlations between its Traded Policies Fund and bond markets.

The traded life policies market has its critics, concerned about whether investors fully appreciate how the market works. To view a related article, click here.