Hedge fund reinsurers have generated better investment returns than traditional reinsurers over the past few years, but underwriting losses have prevented the group from outperforming the traditional Bermuda reinsurers, according to new research from S&P Global Ratings.

Hedge fund reinsurers have recorded average net investment returns of about 10% from 2014 through 2016, versus 2.1% for traditional reinsurers. But the group saw underwriting losses each year, dragging its three-year average return on equity down to 3.9%, trailing traditional reinsurers' return of 9.8%, the rating agency found.

During the period, traditional Bermudian reinsurers saw average favorable reserve releases of 7.1 percentage points, which helped bring combined ratios down. Hedge fund reinsurers, on the other hand, saw unfavorable loss development averaging 2.3 percentage points.

"This could speak to the quality of business" hedge fund reinsurers are writing, analyst Taoufik Gharib said.

Hedge fund reinsurers seek out riskier investments with higher returns for the float generated by insurance operations. Stand-alone hedge fund reinsurers include Fidelis Insurance Bermuda Ltd., Greenlight Capital Re Ltd., Hamilton Re Ltd. and Third Point Reinsurance Ltd., which have between $800 million and $1.5 billion in capital each, according to S&P.

Other reinsurers have started sponsored hedge fund vehicles that benefit from the sponsor's credit profile. Sponsored hedge fund reinsurers include Arch Capital Group Ltd.'s Watford Re, Chubb Ltd.'s ABR Re, AXIS Capital Holdings Ltd.'s Harrington Re and Enstar Group Ltd.'s KaylaRe.

Sponsored hedge fund reinsurers tend to generate more gross premium written and manage lower combined ratios then their stand-alone peers, S&P wrote.