D.E. Shaw shutters most investment funds, but not reinsurance

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According to a report in the Financial Times, one of the world’s largest hedge funds D.E. Shaw which also operates D.E. Shaw Re a Bermuda based reinsurer, is shuttering its flagship funds to new capital as it seeks to safeguard returns for existing investors.

The reason for this is that large, global-macros hedge fund investment strategies have become less profitable in recent years, largely due to the fallout and subsequent recovery from the financial crisis which has made profiting much harder for hedge fund managers. With $32 billion of assets under management, D.E. Shaw is among the very largest and of course it also has a reinsurer.

The FT says that D.E. Shaw closed its Oculus and Heliant funds earlier this year and has now shuttered its flagship multi-strategy Composite fund as well. It has become much more difficult to profit from the type of global macro trading that hedge funds like D.E. Shaw have excelled at in the past. By shutting funds to new money the hedge fund can prevent returns from being diluted further for its existing investors.

D. E. Shaw is not entirely closed to new injections of investment capital though, a number of smaller, specialist funds remain open at the hedge fund, according to the FT, with one of them being a reinsurance strategy.

D.E. Shaw deploys significant capacity in the reinsurance markets, estimates have suggested over $2 billion in the past, and plays a major role in the reinsurance and retrocessional reinsurance markets.

Clearly D.E. Shaw sees plenty of opportunity to grow its role in reinsurance, hence keeping its reinsurance strategy open to new investors allowing it to increase the amount of business it underwrites. For every reinsurance contract underwritten, D.E. Shaw will put the premiums to work within its hedge fund strategies in the manner of the typical hedge fund backed reinsurer strategy, allowing it to capitalise on a source of investment income from the reinsurance market.

The fact the D.E. Shaw is keeping its reinsurance fund open is testament to how attractive hedge fund managers find the reinsurance business and to the fact that reinsurance is increasingly seen as an asset class by institutional investors.

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