Abacus investment has emerged as an intriguing alternative investment option in recent years. With the growing popularity of abacus among institutional and retail investors alike, it is important to develop a foundational understanding of this unique asset class. In this article, we will explore the basics of abacus as an investment, including its history, structure, risks and benefits, and outlook going forward. Key considerations around due diligence, portfolio construction, and performance evaluation will also be addressed. By demystifying the world of abacus, investors can make more informed decisions about whether this distinctive approach belongs in their portfolios.
The Origin and Evolution of Abacus as an Alternative Investment
The concept of investing in life insurance policies originated in the late 1980s during the AIDS crisis, when terminally ill patients sold their policies to gain funds. This practice of viatical settlements eventually expanded to seniors selling their policies for income. The life settlement market became more mainstream in the 1990s and 2000s as the population aged. Well-known investors like Warren Buffett have since invested in life settlements. The abacus structure was developed to bundle policies together to diversify risk and create an investable asset class. Portfolios are carefully constructed based on metrics like life expectancy, premiums, and death benefits.
The Pros and Cons of Abacus as an Investment
Abacus offers relatively uncorrelated returns, since performance is not tied to broader market swings. It also provides steady yields, as death benefits pay out at a predictable rate over time. However, the illiquid nature of policies and lack of transparency into pricing are downsides. There is also longevity risk if insured individuals live longer than projected. Proper due diligence and portfolio management are key to mitigate risks and maximize upside.
Evaluating Abacus Investment Performance and Benchmarks
Unlike stocks and bonds, there are no widely accepted benchmarks for abacus, making evaluation difficult. Many investors look at gross IRR over time, using mortality projections as the baseline. Net returns after fees also matter. Comparison to annuities, bonds, and alternative yield investments provides context. Monitoring mortality experience v. assumptions and premium payments v. projections informs the health of abacus holdings.
constructing a Diversified Abacus Portfolio
Diversification is critical in abacus investing to manage risk. Investors should target a mix of policies based on face value, life expectancy, gender, age, health, and premium obligations. Exposure across insurance carriers also reduces concentration risk. Ongoing monitoring and rebalancing helps maintain target exposures over time. Secondary markets provide some liquidity to refine portfolios.
In conclusion, abacus investment offers unique risk-return characteristics but requires thorough due diligence and active management. For investors seeking diversification and yield, abacus can potentially enhance portfolios. However, the complexities of this asset class mean it may not suit all investor objectives and risk preferences.