(Bloomberg) — Hedge fund firms that set up reinsurance companies will struggle because too many rivals had the same idea and investment results have been disappointing, according to a report from S&P Global Ratings.

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

“It’s a crowded trade,” S&P analyst Taoufik Gharib said by phone. “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 sufficient returns because many have yet to post an underwriting profit, Gharib said. Third Point Reinsurance Ltd., which is linked to Dan Loeb’s hedge fund, is trading for less than its initial public offering price and is on track for its third straight annual decline in New York trading, stung by both sub-par investment performance and unprofitable insurance contracts. David Einhorn’s venture, Greenlight Capital Re Ltd., has also posted losses on weak underwriting results and faltering investments.

‘Significantly riskier’

“These strategies tend to be significantly riskier and consume considerably more capital than those typical of traditional reinsurers,” the S&P analysts wrote in the report, adding that some 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 AQR Capital Management, which shuttered after hedge fund startups pushed down reinsurance pricing. Investors are also becoming more hesitant. Oaktree Capital Group LLC this year scrapped plans to form a reinsurer with XL Group Plc.

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

Special Reports /

Hedge funds' reinsurance companies could become 'roadside carcasses,' S&P says

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