David Einhorn’s Greenlight Capital Re is down over 8% in one month — and down nearly 3% during trading Wednesday — as the hedge fund manager continues to battle investment performance issues.
Tumbling over 6% year to date, Greenlight Re and other hedge fund-backed reinsurers suffering the same investment fortunes have begun to inject something not usually seen in the sector: volatility.
“Their leverage to equity is much higher than traditional reinsurers, so investment results are amplified to the upside and the downside,” says Brett Shirreffs, vice president of equity research at Keefe, Bruyette & Woods in New York. “I think Investors expect volatility, the bigger question for them is how much more competition will they face in the future.”
Greenlight Re announced disappointing investment results for September, with net returns down -1.5% following a 3.7% investment loss in the third quarter.
Third Point Re — backed by hedge fund manager Daniel Loeb — is also struggling and its shares are down over 22% year to date. Third Point reported negative investment results for September 30 period — down 0.3 percent.
Sirrreffs dismisses the notion that the performance of Greenlight and Third Point is the result of any “fundamental” issue with the new crop of reinsurance players. “There hasn’t been a real deterioration in the price to NAV. Most of the weakness is in the investment performance side,” he says. “They have a levered portfolio because they want to take full advantage of their float, and investors expect that volatility.”
For investors in the space, the more important issue to watch is what new competitor enters the space in the next several months.
“There are a number of hedge funds that rumoured to be entering the reinsurance business and some have tried and failed,” Shirreffs adds. There is certainly the interest out there to pursue the reinsurance route in creating permanent capital, the challenge is getting the the talent and operational expertise to different on underwriting.”
