It's easy, and perhaps even commonplace, to label anything in the reinsurance industry with the words "hedge fund" attached to it as "alternative capital" and categorize it in the same bucket as every other new-capital approach. But just as traditional reinsurers employ a number of different strategies when they do business, so too do players backed by capital from non-traditional sources.
Alternative capital has become a hot topic in recent years among reinsurers as hedge funds and pension funds have flooded the market with capacity and innovative approaches to writing business at a lower cost of capital, increasing competition and pressuring rates particularly in lines like property catastrophe. However, just because a player in the reinsurance market is backed by capital from a non-traditional source does not mean that in most respects it can't walk, talk and act like a more traditional reinsurer, albeit with its own approach to building its book of business.
The many faces of 'alternative capital'
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