Not all hedge funds see investments in the reinsurance industry as a short-term strategy, said Chris McKeown, chief executive of two Bermuda reinsurers set up in the last 18 months by Chicago-based Citadel Investment Group Llc.

The growing $1 trillion hedge fund industry is under increasing pressure to produce better-than-market returns, leading critics to question if hedge funds will abandon reinsurance investments when market conditions soften.

The cash-flush sector started moving into reinsurance investments in recent years, in an on-going bid to find new opportunities to create returns.

?Companies who put their name on the door; who own a fully fledged reinsurance company are probably making a longer term commitment to the business because they see the ability to make money,? Mr. McKeown said, speaking on Tuesday at a conference being held on the Island by the Intermediaries and Reinsurance Underwriters Association.

Mr. McKeown does not deny that hedge funds? primary focus is to get investors the best return possible but he suggests that the convergence between the two sectors could also be of benefit to the reinsurance sector.

Reinsurers have typically posted see-saw results, swinging between profit and loss based on market conditions ? a volatility that many that work and invest in the industry would like to see tamed.

?Even though there are some issues that need to be addressed, can we make reinsurance less arcane, more transparent, less illiquid and can we make money in reinsurance? The answer to those questions is yes,? said Mr. McKeown, who was hired away from Ace Tempest Re to run Citadel?s first Bermuda reinsurer, CIG Re, when it formed late in 2004.

Hedge funds first started moving into the reinsurance sector several years ago, initially by investing in companies and in catastrophe bond transactions, which spread the risks in insurance policies into the capital markets instead of through the more traditional reinsurance route. More recently, hedge funds have been providing capital, and hiring management, to run fully-fledged reinsurance companies.

The cash-rich investment pools have typically been attracted to the sector because it is seen as another asset class, beyond equities and bonds.

?Hedge funds are typically absolute return type vehicles and they always want to make money both in good and bad times,? said Mr. McKeown.

In addition to his post at CIG Re, Mr. McKeown was also named chief executive of New Castle Reinsurance Company Ltd., a second Bermuda reinsurer formed by Citadel after signs reinsurance rates would increase in the wake of Hurricane Katrina, particularly for property-catastrophe policies.

Mr. McKeown said Citadel, a $12 billion hedge fund group formed by one of the industry?s best known managers, Ken Griffin, branched into reinsurance because it was seen as an uncorrelating complement to other investment strategies the group employs. Nephila Capital, which set up in Bermuda in 1999, was an earlier example of hedge funds investing in the sector.

And post-Katrina, hedge funds were some of the biggest investors in the sector. Some hedge funds stepped up to help established companies shore up capital after large losses, and some provided funding for a wave of start-up reinsurers, as well as investing in insurance-linked securities.

Despite some scepticism over hedge funds? motives for investing in the insurance sector, reinsurance buyers are now becoming more receptive to the entrance of hedge fund-backed reinsurers, Mr. McKeown said. He said this was largely because of their ability to offer collateralise contracts.

Under a collateralised insurance agreement, funds that may be needed to pay claims are set aside in a trust fund. This gives the insured certainty their claim can be paid if a catastrophe strikes.

Mr. McKeown said being able to collateralise policies has been a selling point after Hurricane Katrina, with reinsurance buyers eager to know their reinsurer will be in a position to make good on claims. Katrina, which devastated the US Gulf of Mexico region last August and is the most expensive catastrophe on record, left the insurance industry with a bill in the region of $60 billion.