How important are loss ratios to LPs as an indicator of risk?
“Loss ratios serve as an intuitive proxy for risk measurement, which is important, because investors don’t only want to understand the return they are getting, but also the level of risk being taken to achieve that return. And, unlike in the public markets, where you can use standard deviations, there are limited alternatives.”
Gregory Brown
“We do look at loss ratios, but we take it to a more granular level to really understand the narrative behind any losses and the risks taken at an individual company level, including the use of leverage and customer concentration, for example. When things go wrong, we want to hear the story so that we can understand the extent to which bad luck was at play, or if these were issues that should have been identified during due diligence.”
John Haggerty
“Our underwriting process takes in both qualitative and quantitative factors. Loss ratios are among the quantitative factors we consider, along with impairment ratios – the equivalent of loss ratios, but applied to unrealised deals. However, both of those will only ever tell part of the story.”
Michael Barzyk
“When assessing a fund opportunity, we consider both the potential return and the global risk profile assigned to achieving that performance. We evaluate that risk in multiple ways, and loss ratios are just one of these.”
Jessica Sellam
“A lot of investors care about loss ratios, which I find puzzling. If I have a 3x fund, does it really matter whether that fund achieved its 3x with fewer losses than another 3x fund? It could be important if those losses were predictive of anything going forward, but that is not something that we can tell from this paper.”
Steven Kaplan