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Reporting Loss, MaxRe Continues Shift Out of Hedge

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HAMILTON, Bermuda (–Max Re Capital Ltd. continued to shift its emphasis away from hedge funds as it reported a third quarter net operating loss.

The company also announced it would begin paying a fund of funds management fee to Moore Capital Management Inc., Morganville, N.J., for its management of outside managers. Moore manages a portion of its US$607 million alternatives portfolio through a fund called Moore Diversified Strategies. Max Re has US$1.9 billion in total investments.

Max Re originally was formed with the goal of combining low-risk reinsurance underwriting with the healthy returns of hedge funds, but more recently the firm’s management has decided to shift into additional kinds of reinsurance and out of alternatives securities. Though both its alternatives and fixed-income investments have produced positive returns, they haven’t been strong enough to regularly produce earnings for the company. Max Re preannounced the loss early in October.

The net operating reported by Max Re for the quarter was US$17.7 million, or US$0.39 per diluted share, down from a loss of US$11.2 million, or US$0.26 a share, in the previous year’s third quarter. The loss for the first three quarters of this year came to US$14.3 million or US$0.37 a share.

Like much of the industry, Max Re’s hedge fund performance has been unimpressive. Max Re’s alternatives portfolio returned 0.25% in the third quarter and was dragged down by negative returns from distressed securities and US$41 million in event-driven arbitrage strategies, which returned -2.88% and -2%, respectively. Max Re had US$90 million invested in distressed and US$41 million in event driven as of Sept. 30.

The US$536 million Moore Diversified Strategies portfolio return was relatively weak at -0.16% in the third quarter, though executives are happy with Moore’s returns and performance long term. Executives have not considered replacing Moore, which is run by Louis Bacon. An affiliated firm, Moore Holdings, L.L.C., and Capital Z Partners, are the primary founders of the company. “Moore’s performance has been solid relative to hedge fund indices and returns across the board,” said Robert J. Cooney, chairman and chief executive, speaking at the earnings conference call. “It’s been a tough environment the last two years for alternative returns,” Mr. Cooney said.

The new management fee of 0.7% to be paid to Moore was instituted as part of the original plan to employ Moore, which has been working for free for three years. Moore also will be paid a performance fee of 7.5% after a hurdle of 10% is achieved. Executives said the fee is low relative to what other hedge fund of funds managers charge.

Max Re did receive good quarterly performance from its fixed-income arbitrage managers and its futures managers. The company’s fixed-income arb portfolio returned 3.77% and had assets of US$31 million on Sept. 30. Futures managers returned 4.41% but only managed about US$18 million as of the end of the quarter.

Year-to-date through September, alternatives at Max Re returned 1.11%, with the following categories providing negative returns: distressed, -3.92%; long/short equity, -3.03%; event-driven arb, -2.74%; opportunistic, -2.28%; emerging markets, -0.63%; and merger arbitrage, -0.43%.

On the positive side for the first three quarters of 2002 were fixed-income arb, 8.73%; commodity trading advisers, 4.41%; diversified arb, 3.93%, global macro, 3.06%; and convertible arb, 1.96%.

Moore Diversified Strategies returned 0.13% in the year-to-date period through September.

The company’s US$607 million in alternatives is down from US$628 million as of the end of 2001. Max Re officials expect to continue to shift money out of alternatives, which require higher capital commitments from insurance ratings agencies as the company shifts its focus on underwriting a greater variety of policies.


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