AQR Capital Management Establishes Reinsurance Group

Jul 25, 2011, 06:00 ET from AQR Capital Management

GREENWICH, Conn., July 25, 2011 /PRNewswire/ -- AQR Capital Management today announced the formation of a reinsurance group that will develop investment strategies that have low correlation with traditional markets and hedge funds.

David G. Kabiller, founding partner of AQR and Head of Client Strategies, is organizing this business and has recruited Andrew J. Sterge, PhD to lead the reinsurance effort.  Dr. Sterge, who studied game theory at Cornell, is a top reinsurance specialist and former head of both Pulsar Re Holdings, the reinsurance affiliate of Magnetar, and the Cooper Neff Group.

Stated Mr. Kabiller, "AQR now has an experienced reinsurance group.  It is led by widely recognized industry experts who specialize in portfolio construction and includes expert underwriting and sourcing of these risk premiums."

The AQR reinsurance group will offer dynamic exposures to a set of risk and reward opportunities that are difficult to assemble.  These total over 50 different territory and peril exposures with minimal correlations among themselves.  The firm expects these exposures will vary substantially from those prevailing in the credit, commodity, equity and currency markets.

AQR conducted an extensive analysis of risk/reward characteristics and the capital requirements and opportunities for reinsurance in general, and soon intends to publish a white paper on its findings. The white paper demonstrates that:

  • The magnitude of the risk premiums offered in reinsurance resemble those in equities, but unlike equities, there are dozens of reinsurance risks that are independent of one another, increasing the potential for improving the risk/reward characteristics of a portfolio.
  • A 20-year historical performance review of reinsurance portfolios reveals little significant correlation to global equities, US fixed income, high yield credit, commodities and hedge funds.
  • Also looking back 20 years, a risk balanced portfolio of reinsurance spread across distinct territories and perils outperforms a "peak peril" portfolio that is concentrated in US hurricane, US earthquake, European windstorm and Japan earthquake.

Added Mr. Kabiller, "Reinsurance is one of the most diversifying sources of risk premium that a pension fund can access, in part because reinsurance risks are diversifying among themselves, unlike the correlation one finds among other financial assets. Reinsurance risk allows you to construct a portfolio with very high risk-adjusted returns and limited downside, but with an equity-like risk premium.  A diversified portfolio of reinsurance makes for an attractive strategic allocation for pension funds."

AQR's view of reinsurance conforms to the firm's general approach to new investment frontiers. AQR undertakes extensive research, often in conjunction with major educational institutions, to analyze and calibrate discrete market inefficiencies that when aggregated, can be successfully exploited through dynamic exposure strategies. AQR's investment approach strongly emphasizes diverse exposure to a broad set of risk opportunities, often in the realm of market inefficiencies created by tendencies unearthed through analysis of behavioral economics.

The reinsurance strategy has a $250 million funding goal and will be capitalized by AQR and outside investors.

Working with Andrew Sterge will be two veteran, London based reinsurance underwriters, Rick Montgomerie and Charlie Vaughan.

About AQR Capital

AQR Capital Management, LLC is an investment management firm located in Greenwich, CT. The firm's founding principals, Clifford S. Asness, Ph.D., David G. Kabiller, CFA, Robert J. Krail, and John M. Liew, Ph.D., along with several colleagues, founded AQR in 1998. Each of the founding principals was formerly at Goldman Sachs, & Co., where Asness, Krail, and Liew comprised the senior management of the Quantitative Research Group at Goldman Sachs Asset Management.

As of June 30, 2011, AQR managed approximately $41 billion in assets, primarily for institutional investors such as pension funds and endowments. The firm offers a broad range of investment strategies which include aggressive, high volatility market-neutral hedge funds, as well as low volatility, benchmark-driven traditional separate accounts. AQR Funds, a family of open-end registered investment companies, was created to provide mutual fund investors with access to these alternative and innovative strategies.

SOURCE AQR Capital Management