Asian institutions have started to invest in life settlement funds and the market is being tipped for further growth. Life settlement funds are pools of life policies sold on by their original policyholders in exchange for a lump-sum payment, and are viewed as having a low correlation to traditional asset classes.

UK-based Managing Partners, a life settlement investment company, has recently set up in Asia and has been pitching life settlement assets to Asian institutions in open-ended fund form. Credit Suisse has been growing its teams, pitching a synthetic pass-through risk structure to institutions, and other investment banks are also involved or looking to get involved in the market, according to sources.

One Asia-based senior actuary at an international insurer said there is "certainly potential" for such products in the lower interest rate environments in Asia, in markets such as Japan, Korea and Taiwan.

Harvey Athwal, Managing Partners' sales director for Asia based in Hong Kong, said the company is receiving most interest from Japan and South Korea, and that pension funds are most interested in the assets. He says insurers and pension funds are more comfortable making investments in an asset where the use of mortality tables is an important component to understanding valuations.

Three years ago, he says, a 9% return was unlikely to have proven been particularly attractive to Asian investors, with most seeking returns as high as 20-30% a year - even pension funds. "After the markets moved downhill, and volatility moved into the markets in a big, big way, people wanted to head for safety assets," says Athwal. "The risk taking isn't there."

Proponents of life settlements believe they provide a non-correlated return with little volatility. They are not correlated to equities or credit, according to Athwal, because they are based on receiving the returns of life insurance policies when the purchaser dies, which should not be connected to the performance of financial markets.

The policies are bought from seniors, averaging 80 years' old, in the US, who might typically have cancelled their policy to save money in the past. Increasingly, however, they are selling their policies after US regulators forced insurers to make policyholders aware of the opportunity to do so. Mortality tables are used to calculate how much it will cost to fund the policy for the average lifespan, which is the investment capital put forward by the investor.

Athwal said life settlements are bought at present value, and offer a guaranteed profit at some date in the future. He explains they have absolute returns because it is known in advance how much eventually will be returned by the policies, and they have almost no volatility. There are two risks associated with the asset class: firstly longevity, which can be mitigated by buying large numbers of policies in a fund, and secondly counterparty risk. He noted the second factor is met by US state guarantees, which guarantee the policies up to $500,000, the exact number depending on the state, meaning an investor would still get the returns if the insurer went bust - as long as the state did not also default.

Managing Partners is offering open-ended funds on the asset class, and recently became the first company to have a life settlement fund authorised for distribution into Korea. The company is also in discussions with two asset managers in Korea with a view to launching feeder funds, and is developing partnerships in Malaysia, Singapore and the Philippines. It is looking to raise $300 million in Asia for its fund this year and has already received mandates for $200 million.