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Calmer days after hedge funds’ whirlwind success

The stellar returns from reinsurance that lured in hedge funds in the wake of the 2005 hurricanes have dissipated. But this won’t deter managers with long-term strategic plans, reports Helen Avery.

WHERE THERE ARE healthy returns to be made, there will be a hedge fund manager lurking nearby, and the insurance industry has been no exception. With hedge funds predominantly playing the insurance-linked securities area of catastrophe bonds, hurricanes Katrina, Rita and Wilma (KRW) in 2005 sparked a new means of gaining exposure to the insurance market for managers. Desperate for capital to meet losses, reinsurers were forced to turn to hedge funds to make up the shortfall, and the door to participating directly in the insurance market was opened. Almost half of the $12 billion in capital raised towards meeting the KRW losses is estimated to have come from hedge funds.

The significant returns on offer encouraged hedge fund managers not only to take direct exposure to insurance through joint ventures with reinsurers in sidecars but, in some cases, to go as far as setting up their own separate reinsurance businesses.

But two years on, with no big natural catastrophes having occurred, the majority of hedge funds that diversified into reinsurance are bored. Property catastrophe reinsurance renewal rates in the US fell by as much as 20% over 2007 in some areas. And with the man-made catastrophe of sub-prime taking centre stage now, hedge fund managers have more pressing concerns and, in some cases, better investment opportunities elsewhere.

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