Hedge Fund Reinsurers
Hedge Funds Opening Reinsurance Businesses Offshore
An interesting new development in the hedge fund industry is the rush to open reinsurance businesses in Bermuda and the Cayman Islands. Reinsurance is basically insurance for insurers, insurance companies will look to reduce their exposure to large numbers of claims by obtaining insurance on their own insurance business. For hedge funds, the main draw is the steady flow of premiums which, under the law of the offshore locations, can be reinvested into the fund, thus giving hedge funds a new and less fickle form of capital.
So why are hedge funds entering this business?
It’s the money. Hedge funds are perpetually plagued by fickle investors who want to withdraw money at the first sign of deteriorating results. But a hedge fund can set up a reinsurer in Bermuda or the Cayman Islands. Under the regulations of these islands, the new reinsurer can then use the premiums it collects to invest with the hedge fund itself. The hedge fund suddenly has hundreds of millions in permanent capital that can’t be withdrawn.
The hedge funds are also looking to capitalize on the increased interest by pension funds and endowments in reinsurance. With the stock market a shaky investment and yields low, pension funds and others are piling into the reinsurance market in search of higher yields. The Pennsylvania Public Schools Employees’ Retirement System, for example, recently invested $200 million in the Aeolus Property Catastrophe Fund, which finances reinsurance of catastrophe claims.
David Einhorn’s Greenlight Capital pioneered the hedge fund-sponsored reinsurer in 2004, when Greenlight set up Greenlight Re in the Cayman Islands. Since then, a number of other hedge funds have entered the reinsurance market, but in the last six months what was a trickle is turning into a flood. Daniel S. Loeb of Third Point has announced the creation of a $500 million Bermuda reinsurer named TP Re. Steven Cohen’s SAC Capital Advisers has also created a Bermuda reinsurer called SAC Re, which is also raising $500 million.
Hedge funds are also big players in a reinsurance instrument known as a catastrophe bond. These bonds pay out only if there has been a significant event like a hurricane. According to GC Capital, $13.5 billion in catastrophe bonds were outstanding as of the first half of 2012. The catastrophe bond market has been around for a while, but as money pours into this sector, it is likely that hedge funds and other financiers will rush to create other types of reinsurance financial products to draw in money. Source
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