Reinsurance: the perfect hedge fund strategy to enhance a portfolio’s Sharpe ratio?

Reinsurance is one of the few hedge fund strategies that has almost no correlation to the stock or bond markets and has the potential to generate high single digit to low double digit returns on average over the next 5 to 10 years, regardless of the direction of the capital markets. It is important for investors to stress test their overall portfolio for major market selloffs, because most hedge fund strategies’ correlations to the capital markets are dynamic and rise dramatically during market selloffs as we saw in the 4^th quarter of 2008. Reinsurance funds provided valuable diversifications benefits during that period. This brings us to the question: what is reinsurance and how should an investor evaluate managers in this...