We have been talking about the risks that are associated with hedge funds’ recent frenzy to takeover the reinsurance business. Almost every major hedge fund manager is allocating capital for this line of business. Greenlight Capital Re, Ltd. (NASDAQ:GLRE), Paulson & Co, Soros Capital Management, Third Point Offshore Investors Ltd (LON:TPOE), Citadel, and Man Group Plc (LON:EMG), all have reinsurance set-ups.
The latest player in the business has been Steve Cohen’s SAC Capital,which started off with an investment of $500 million, back in July. SAC Capital is recruiting Tim Duffin as deputy property catastrophe underwriter and Kathleen Reardon as chief underwriting officer for property. As SAC Re sets up business in the market, which has generated stark criticism from Fitch ratings, new inroads are being made for easy access to reinsurance capital for smaller hedge funds.
Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
Multi-Strat Re, a Bermuda based company, is an easy shot at reinsurance for small hedge funds, and reduces the need for any considerable allocation of time and money in the business, Royal Gazette reports. The upstart is the brainchild of Joseph Taussig, of Taussig Capital, who manages an advisory firm, and has previously assisted other big names with their reinsurance transition. Taussig says he has already signed on a handful of clients and expects the business to expand speedily.
“I mean, Buffett laid out this thing 40 years ago, and people would look at it and go, ‘Gee, I’d like to try to do it, but what have I got to do to get there?, said Taussig, “We’re just making it easier to get there. You don’t have to be big to take advantage of it.”
The risks and weaknesses of hedge funds’ expansion into reinsurance stems from their inability to generate consistent returns. A low earnings quarter can result in problems for the backer of reinsurance, especially when the earnings have been mediocre for a long period of time. It is also contested that since hedge funds invest heavily in stock markets, a chain reaction could play out when hedge funds sell their assets to pay off claims. Such an event can potentially destabilize the stock market.