(Bloomberg) — Hedge fund firms that set up reinsurance companieswill struggle because too many rivals had the same idea andinvestment results have been disappointing, according to a reportfrom S&P Global Ratings.

Money managers entered the reinsurance business to gain accessto permanent capital, in some cases more than $1 billion. They alsosought a tax advantage by setting up operations in locations suchas Bermuda. Reinsurers provide coverage for primary carriers.

“It’s a crowded trade,” S&P analyst Taoufik Gharib said byphone. “Hedge fund reinsurers, they don’t have a long track record,and they’re trying to compete.”

It will be difficult for such ventures to generate sufficientreturns because many have yet to post an underwriting profit,Gharib said. Third Point Reinsurance Ltd., which is linked to DanLoeb’s hedge fund, is trading for less than its initial publicoffering price and is on track for its third straight annualdecline in New York trading, stung by both sub-par investmentperformance and unprofitable insurance contracts. David Einhorn’sventure, Greenlight Capital Re Ltd., has also posted losses on weakunderwriting results and faltering investments.

‘Significantly riskier’

“These strategies tend to be significantly riskier and consumeconsiderably more capital than those typical of traditionalreinsurers,” the S&P analysts wrote in the report, adding thatsome of the firms could become “carcasses on the side of the road,”without specifying which ones.

S&P cited the closing of ventures since early 2015,including ones tied to Paulson & Co. and Cliff Asness’s AQRCapital Management, which shuttered after hedge fund startupspushed down reinsurance pricing. Investors are also becoming morehesitant. Oaktree Capital Group LLC this year scrapped plans toform a reinsurer with XL Group Plc.

Money managers are better off pairing with an existing reinsurerbecause they can then gain access to a wider class of clients,S&P said. BlackRock Inc. formed a Bermuda-based operation lastyear with the insurer that is now known as Chubb Ltd. BlackstoneGroup LP joined with reinsurer Axis Capital Holdings Ltd. to raisemoney for a venture.

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