Two of the most prominent hedge fund reinsurance firms have seen an improvement in their investment returns in October, after two consecutive months of deeply negative returns due to financial market volatility.
Both Third Point Re, backed by hedge fund manager Daniel Loeb and his Third Point LLC firm, and Greenlight Re, backed by hedge fund manager David Einhorn’s Greenlight Capital, Inc., achieved positive returns in October as financial market conditions became more stable and the hedge fund managers behind the reinsurers investment portfolios started the task of recouping some losses.
Both firms experienced a difficult August and September, with Third Point Re reporting -5.1% for August and -4.4% for September, while Greenlight Re reported -5.5% for August and -3.5% in September.
2015 has been particularly difficult for the hedge fund reinsurance firms, with global financial market volatility, ongoing sovereign issues such as Greece, Chinese market volatility, commodity price declines and uncertainty around interest rates, all impacting any reinsurer with an investment-oriented strategy.
In October Third Point Re in particular reversed its investment misfortune most dramatically, achieving a positive return of 4.6% in October, which was sufficient to take its year-to-date investment return back to positive at 0.1%.
Greenlight Re however could not reverse its misfortunes as dramatically, only achieving a 0.7% positive investment return in October. For the year-to-date Greenlight Re’s investment portfolio return remains poor at -16.4%.
For Greenlight Re, to get the investment return back to positive by year-end looks increasingly unlikely, unless Einhorn can make some big bets pay off in the last two months of the year. Third Point Re however could come out looking much healthier if it could repeat its October investment performance in November and December.
The financial market environment has hit most investment oriented or hedge fund backed reinsurers, as well as many traditional re/insurers who have also been hit by issues like China and commodities.
Watford Re was another example of an investment oriented reinsurance vehicle that saw investment portfolio losses through the third-quarter, as we reported last week here. Meanwhile the John Paulson and Validus hedge fund reinsurance joint-venture PacRe Ltd. also suffered investment losses in Q3.
While October has seen a bounce back, at least most clearly for Third Point Re and Greenlight to a lesser degree, there is no certainty that volatility won’t return in the final two months of the year.
The financial climate is hurting these reinsurers and making the business model, of lower-volatility underwriting together with an active investment strategy managing the premium float, look a particularly challenging one at this time.