Among the hedge fund investment sectors set to benefit from rising institutional investor interest in 2025, Agecroft Partners believes that reinsurance focused insurance-linked securities (ILS) strategies are “poised to attract substantial capital inflows in 2025.”
Agecroft Partners, the hedge fund consulting and marketing specialist, has published its annual predictions for the biggest trends in the hedge fund industry for 2025.
Based on the firm’s discussions with over 2,000 institutional investors and hundreds of hedge fund managers, Agecroft Partners predicts there will be rising demand for reinsurance and ILS investment managers in 2025.
In a new whitepaper the consultancy explained, “Over the past decade, reinsurance hedge fund managers experienced a surge in demand, followed by a decline due to underwhelming performance largely driven by historically low pricing in the industry.
“However, in recent years, pricing has rebounded sharply—doubling or more from its lows in certain cases—leading to consecutive years of strong performance.
“Despite this success, current pricing levels remain significantly above historical averages, creating a favorable environment for managers.”
Going on to state that, “In 2024, many traditional asset classes became less attractive due to rising stock price-to-earnings (P/E) ratios and tight credit spreads. This shift has heightened interest in reinsurance-linked strategies, which offer uncorrelated returns.
“As a result, the sector is poised to attract substantial capital inflows in 2025, particularly from large institutional investors seeking diversification and higher returns.”
In addition, Agecroft Partners highlights the fact ILS fund strategies are collateralized, saying that it expects investors will be attracted to them for this reason, as “There will be increased demand for strategies with large collateral reserves.”
The company said, “With short-term interest rates hovering around 4% and market expectations suggesting limited further Federal Reserve rate cuts, these higher yields significantly improve the expected return from strategies often holding as much as 80% of NAV in cash or short-term fixed income positions.”
Reinsurance and ILS investments are highlighted as an example of strategies that fit this model, as one example of “hedge fund strategies with substantial cash or short-term fixed income allocations.”
“Reinsurance hedge funds must maintain full capitalization to cover potential liabilities or claims. This capital is held as collateral and typically invested in very short-term, highly rated securities,” they explained.
Interestingly though, at a time when large multi-strategy hedge fund managers are increasingly attracted to the insurance-linked securities (ILS) and reinsurance investment opportunity, with some establishing specific ILS pods, Agecroft believes there may be a decline in demand for the larger multi-strategy funds, given their growth has resulted in capacity constraints which can limit their ability to generate alpha, the company said.
However, Agecroft Partners also noted that, “There will be increasing demand for smaller multi-strategy hedge funds that leverage external managers to construct diversified portfolios,” as it expects a shift away from larger, more complex hedge fund manager platforms in 2025.
With ILS and reinsurance new to many of the hedge fund manager cohort, it seems that concerns over their capacity constraints may not apply so much for what would be a new and welcome diversifying source of returns.
