AQR Catastrophe Insurance Investing Shows Promise

Chidem Kurdas

Storms are unrelated to stocks and bonds. So an asset based on storm insurance premiums should be diversifying and immune, for instance, to the European debt crisis. From observations like that came the idea of turning reinsurance into an investable asset.

But doing so requires specialized skills. About a year ago AQR Capital formed a reinsurance group, hiring Andrew Sterge, the former chief of Pulsar Re, the reinsurance arm of Magnetar hedge fund.

Persuading clients to put money on this unusual strategy is another challenge. David Kabiller took this on and has persuaded some investors, including funds of funds, to allocate to the AQR Risk Balanced Reinsurance Fund.

The European crisis increased institutional investors’ desire for uncorrelated assets, helping make the case for strategies like this. The vehicle did well in the turbulent months early this year, according to an investor.

The “risk balanced” title of the fund refers to its diversification. Insurance companies purchase reinsurance from other insurers for their exposure to hurricanes, earthquakes and other disasters in specific geographic areas. Diversifying a reinsurance portfolio by type of disaster and geography reduces its overall risk while the insurance premiums provide equity-like returns.

AQR found that in the past 20 years diversified reinsurance investments did better than a concentrated portfolio. So the fund diversifies across some 50 regions and types of disaster.

The firm managed $41 billion as of 2011 in a variety of strategies. Mr. Kabiller is one of its founders, all of whom worked for Goldman Sachs before they started AQR in 1998.

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One Response to “AQR Catastrophe Insurance Investing Shows Promise”

  1. AQR Closes Fund to New Clients | HedgeFundSmarts Says:

    […] AQR offers a long list of strategies, including unusual ones such as a reinsurance fund that diversifies across regions and types of natural disaster. […]

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