Hedge Funds Struggle to Replicate Warren Buffett’s Reinsurance Success

Berkshire Hathaway Inc.’s Warren Buffett issued a warning about eight years ago: Reinsurance isn’t easy. Still, hedge fund managers—including David Einhorn of Greenlight Capital and Daniel Loeb of Third Point—have borrowed a bit from Buffett’s playbook and gone into reinsurance, which provides coverage for other insurers.

Buffett had an advantage. He owned insurance companies within his conglomerate and could invest their “float”—the premiums they take in but don’t have to pay out in claims right away. The hedge funds’ approach is different. Their managers have set up separate, publicly traded reinsurance companies that invest in the hedge funds. Investors can use the reinsurance stocks as a way to get a taste of the investments of the hedge funds, which then get more money to use and earn fees on.