Key Takeaways
- • Agecroft Partners, a hedge fund consulting and marketing specialist, believes reinsurance-focused insurance-linked securities (ILS) strategies are "poised to attract substantial capital inflows in 2025" from institutional investors.
- • The firm's view is based on discussions with over 2,000 institutional investors and hundreds of hedge fund managers, published in its annual 2025 predictions whitepaper.
- • Reinsurance pricing has rebounded sharply, in some cases doubling or more from historic lows, and remains significantly above historical averages, per Agecroft.
- • Agecroft cites short-term interest rates near 4% and limited expected Federal Reserve rate cuts, which boost returns on ILS strategies that can hold as much as 80% of NAV in cash or short-term fixed income.
- • Agecroft expects declining demand for large multi-strategy hedge funds facing capacity constraints, and rising demand for smaller multi-strategy funds using external managers.
Summary
Agecroft Partners, a hedge fund consulting and marketing specialist, has published its annual predictions for hedge fund industry trends in 2025. The firm expects reinsurance-focused insurance-linked securities (ILS) strategies to be among the sectors benefiting from rising institutional investor interest, stating they are "poised to attract substantial capital inflows in 2025," particularly from large institutions seeking diversification and higher returns. The forecast is based on discussions with more than 2,000 institutional investors and hundreds of hedge fund managers.
Agecroft described a cycle in reinsurance hedge funds. Demand surged over the past decade, then declined due to underwhelming performance driven by historically low pricing. In recent years, pricing has rebounded sharply, in some cases doubling or more from its lows, producing consecutive years of strong performance. The firm said current pricing remains significantly above historical averages, creating a favorable environment for managers.
Agecroft argues that traditional asset classes became less attractive in 2024 due to rising stock price-to-earnings ratios and tight credit spreads, which has heightened interest in reinsurance-linked strategies offering uncorrelated returns. The firm also highlighted the collateralized structure of ILS funds, forecasting increased demand for strategies with large collateral reserves. With short-term interest rates around 4% and limited expected Federal Reserve rate cuts, the firm said these yields significantly improve expected returns on strategies that often hold as much as 80% of NAV in cash or short-term fixed income. Reinsurance funds must maintain full capitalization to cover potential liabilities, with that capital typically invested in very short-term, highly rated securities.
Agecroft also addressed multi-strategy managers. Although large multi-strategy managers are increasingly entering ILS through dedicated pods, the firm believes demand for the largest multi-strategy funds may decline because their growth has created capacity constraints that can limit alpha generation. It expects increasing demand for smaller multi-strategy funds that use external managers to construct diversified portfolios, reflecting a shift away from larger, more complex platforms in 2025. The firm noted that ILS and reinsurance are new to many hedge fund managers, so capacity concerns may matter less for what it views as a diversifying source of returns.
Agecroft described a cycle in reinsurance hedge funds. Demand surged over the past decade, then declined due to underwhelming performance driven by historically low pricing. In recent years, pricing has rebounded sharply, in some cases doubling or more from its lows, producing consecutive years of strong performance. The firm said current pricing remains significantly above historical averages, creating a favorable environment for managers.
Agecroft argues that traditional asset classes became less attractive in 2024 due to rising stock price-to-earnings ratios and tight credit spreads, which has heightened interest in reinsurance-linked strategies offering uncorrelated returns. The firm also highlighted the collateralized structure of ILS funds, forecasting increased demand for strategies with large collateral reserves. With short-term interest rates around 4% and limited expected Federal Reserve rate cuts, the firm said these yields significantly improve expected returns on strategies that often hold as much as 80% of NAV in cash or short-term fixed income. Reinsurance funds must maintain full capitalization to cover potential liabilities, with that capital typically invested in very short-term, highly rated securities.
Agecroft also addressed multi-strategy managers. Although large multi-strategy managers are increasingly entering ILS through dedicated pods, the firm believes demand for the largest multi-strategy funds may decline because their growth has created capacity constraints that can limit alpha generation. It expects increasing demand for smaller multi-strategy funds that use external managers to construct diversified portfolios, reflecting a shift away from larger, more complex platforms in 2025. The firm noted that ILS and reinsurance are new to many hedge fund managers, so capacity concerns may matter less for what it views as a diversifying source of returns.
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