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The potential for hedge fund reinsurers may be waning as a challenging investment environment, a soft market and sophisticated clients challenge the business model. Intelligent Insurer reports.
In the past few years, hedge funds have been increasingly investing in the reinsurance space in an attempt to diversify the business and boost returns. There are, however, many reasons to believe that the potential for hedge fund reinsurers may be fading.
At first glance, the strategy of hedge fund reinsurers may sound promising. Capital initially invested in the reinsurer is invested in the asset management strategy. In addition to investment returns, the reinsurer also receives premiums on its underwriting activities, which should generate profits which are also invested into the investment strategy.
Provided the investment returns are positive over the long term, the reinsurer is likely to outperform a fund with an identical investment strategy, EY claimed in a 2014 report titled Leading the Way.