Blackstone reduces allocation to reinsurance on changed risk/reward

Blackstone Alternative Asset Management, the hedge fund solutions group of investment and private equity giants Blackstone, has reduced its allocation to reinsurance as a response to a changed risk/reward profile for the asset class.

Blackstone cited inflows of capital into the catastrophe bond market as a driver for its decision to pull-back on its use of reinsurance as an asset class within its Alternative Multi-Manager Fund.

In its annual report for this fund, Blackstone reports that its reinsurance sub-adviser posted gains in the year to 31st March 2014. That sub-adviser is likely Nephila Capital, the largest asset manager in insurance-linked securities (ILS) and reinsurance linked investments, who were selected as sub-advisers for Blackstone’s fund in 2013.

Blackstone reports that reinsurance was a bright spot in the fund’s portfolio in the year to 31st March 2014, as a lack of significant weather events led to gains on catastrophe bond prices. However, Blackstone has also been tracking the risk and reward profile of its investments in the reinsurance space and as a result of that profile changing has pulled-back on allocations to the sector.

Blackstone says in the annual report that it has reduced its allocation to reinsurance in the multi-manager portfolio as the risk/reward profile of the space has been ‘significantly altered’ due to the strong capital inflows into the catastrophe bond market.

The fund’s annual report shows that it has reduced its holdings of catastrophe bonds, from over $24m at the 30th September 2013, down to just $7.1m at the 31st March 2014.

Looking at the values of some of the catastrophe bonds that Blackstone sold, it’s likely that the asset manager was taking advantage of the inflation in secondary cat bond prices and that an element of profit taking and mark-to-market price inflation was at least part of the reason for the sale of some of the older cat bonds.

A number of new cat bonds have been purchased and now feature in the much smaller cat bond part of the Blackstone fund’s portfolio, showing that it has not lost faith in the asset class. Also the fund now has an investment in Bermuda-based hedge fund style reinsurer Third Point Re, showing that reinsurance as an asset class remains an attractive diversification in the fund.

It’s no surprise to see a sophisticated and large asset manager like Blackstone flexing its allocation to a growing asset class like reinsurance, particularly if the risk return profile changes.

In fact, Nephila Capital confirmed that Blackstone’s reduced allocation to reinsurance and catastrophe bonds is as a result of advice the manager gave due to the current market environment. For a mutual fund such as this Blackstone one, the current pricing is not as attractive right now, so its fund assets may be better deployed elsewhere until the pricing environment looks more attractive in reinsurance and catastrophe bonds.

Nephila Capital remains listed as a sub-adviser to the Blackstone Alternative Multi-Manager Fund, according to a summary prospectus which was last updated on the 28th May 2014 and a prospectus filing with the SEC dated June 3rd, which leaves Blackstone, with Nephila’s help, well-positioned to take advantage of opportunities that arise in the reinsurance market in the future.