market folly

In the hedge fund industry, there's a growing trend of managers setting up reinsurers.  While Warren Buffett's Berkshire Hathaway is the most prominent example of using insurance float to invest, many other top managers have started reinsurers, including:

- David Einhorn's Greenlight Capital
- Dan Loeb's Third Point
- George Soros has apparently been involved with 4
- Steve Cohen's SAC Capital
... and many more

Opalesque TV recently sat down with Joe Taussig of Taussig Capital to talk about this trend.  So why have all these funds acquired or started reinsurers?  He notes,

"The primary reason is that the reinsurers are virtually certain to outperform the managers' funds.  Secondarily, the managers obtain assets from sources otherwise unavailable to them and all of these assets are permanent capital.  Tertiary benefits include gentler tax treatment for reinsurers compared to funds in the UK, Canada, Australia, and the US, daily liquidity if the reinsurers become publicly traded, and a better way to monetize the fund manager than selling some or all to a financial institution or doing an IPO."

Some of the publicly traded reinsureres include Greenlight Re (GLRE) and Third Point Offshore (TPOG).

Obviously a major draw is permanent capital.  To truly be a long-term investor, you have to be able to focus on the long-term and not worry about whether or not your investor base is going to pull their capital at the first sign of trouble.  Reinsurers help to partially offset this problem by giving the fund manager stable capital, and in Buffett's case, nullify fickle capital entirely.

Taussig goes into detail explaining this trend, why funds are doing it, and the benefits of doing so in the interview. Embedded below is Opalesque's video: