A growing trend by cash-rich hedge funds to invest in property-catastrophe reinsurance could be tested by Hurricane Katrina?s multi-billion dollar pricetag, those in the industry say.

While the total bill for insurers and reinsurers from Hurricane Katrina?s deadly path across the Gulf Coast on Monday won?t be known for weeks it could end up costing between $9 billion and $16 billion, according to initial estimates from risk modelling firm Eqecat.

Much of that bill could go to reinsurers, including hedge funds that have recently jumped into investments in the sector. ?It was a catastrophic loss and every company in the insurance and reinsurance sector will see some losses, including hedge funds in reinsurance,? said Robert Cooney, chief executive of Max Re, a Bermuda reinsurer that got initial backing from a hedge fund when it was established in 1999.

Hedge funds have been moving into reinsurance because the sector is seen as another asset class, beyond equities and bonds.

The number of hedge funds ? privately owned, cash rich investment vehicles that can generally boast solid, higher than average returns ? has doubled in recent years as wealthy individuals and institutional investors, including insurers, have increased their investments.

Hedge funds are diversifying their investments by setting up mainstream reinsurance companies, and there are other perks. One, they can invest some of the reinsurer?s capital in its fund activities, enabling a tax deferral under the US tax code. And, the fund usually manages the reinsurer?s investment portfolio, to produce additional fee income.

Katrina is the first real test for hedge fund-backed reinsurers. A wave of four serious hurricanes last year left insured losses of some $23 billion, according to the Information Insurance Institute, but the losses came in before most of the hedge fund ventures were up and running.

Much of the Katrina fall-out for hedge funds is likely to depend on what sector of the reinsurance market investments are in, and the terms of those investments.

Hedge funds investing in catastrophe reinsurance, or ?cat?, bonds could be unscathed by Katrina, according to a report from insurance rating agency Standard & Poor?s on Tuesday.

Catastrophe bonds allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk through the capital markets instead of by traditional reinsurance coverage.

S&P said insured losses from Katrina were not expected to hit a level that would default, or trigger claims payouts, for the $1.6 billion worth of catastrophe bonds that have exposure to Atlantic hurricane activity.

But mainstream reinsurance companies are not likely to get off so lightly, according to another Standard & Poor?s report on Tuesday.

Mississippi and Louisiana don?t have a government scheme to help pay for storm damage, like Florida does, leaving insurers to pay Katrina-related claims from their own reserves, or cash in on reinsurance, according to S&P.

Insurers buy reinsurance to spread the risk in the policies they?ve sold. Catastrophe reinsurance ? which is where hedge funds have been putting their money ? spreads the risk in insurance policies that protect individuals and corporations against the cost of damage from events like Katrina.

Reinsurers expect to pink up when catastrophes hit. ?That is exactly what we are there for; these big events,? said Jim Bryce, president and chief executive of IPC Re, a Bermuda reinsurer that was established by American International Group Inc. and other investors, after 1992?s Hurricane Andrew drained billions of dollars out of the sector.

But hedge funds, which usually take a more short-term approach to making money than reinsurers, could lose interest in the sector if hurricane losses mount.

?Hedge funds are known for their nimbleness to get in and out,? said Mr. Cooney, whose company, Max Re, is a large investor in fund of funds: funds set up to invest in a variety of hedge funds.

While hedge funds are not necessarily long-term investors, and may bow out of investing in the sector if there are a string of losses, or if rates fall too low, Mr. Cooney said one event may not make them jump.

?An event like this is painful but it often firms up pricing so I would argue that it could be a good time to be in the business,? he said.

Mr. Cooney said demand for this type of reinsurance could shoot up if his hunch that Katrina could prove more costly than 1992?s Hurricane Andrew proves right. ?There is a supply and demand factor and this loss may be the biggest ever.?

Andrew is, to date, the most costly single hurricane ever, costing insurers and reinsurers $21 billion, in today?s dollars.

Hedge funds are, in general, attracted to the ?short-tail? nature of property-catastrophe reinsurance because these policies can be settled in a matter of months, hence the name.

A year ago, the trend of hedge funds investing in reinsurance broadened from investments in ?cat? bonds to taking the bigger step of setting up traditional catastrophe reinsurance companies.

The variations of ways hedge funds are investing in reinsurance come as fund managers face pressures to outwit each other for new ways to maintain the high returns the industry is known for.

Hedge funds have attracted more investors, according to a July report from global accounting giant KPMG and UK think tank CREATE, partly because ?of the prolonged bear market? with investors pessimistic about the returns they can get in the stock market, seeking alternative ways to grow their assets.

Nephila Capital, set up in Bermuda in 1999, was an early example of a hedge fund investing in catastrophe bonds.

CIG Re, also of Bermuda, was set up last year to sell property catastrophe reinsurance policies. The company is backed by Citadel Investment Group, a Chicago-based hedge fund firm led by Kenneth Griffin, one of the industry?s top traders.

And in June, Montpelier Re Holdings Ltd., a Bermuda reinsurer established after the September 11 terrorist attacks, partnered with hedge fund manager West End Capital Management (Bermuda) Ltd., to form a new reinsurer, Rockridge Reinsurance Ltd., in the Cayman Islands.

West End saw reinsurance as such an attractive opportunity it backtracked on plans to set up stand-alone fund for Japanese investments, in favour of forming Rockridge.

?Since the beginning of the year, the yen has gone sideways,? said West End marketing manager Brent Slade. ?We thought we would be more opportunistic and set up a reinsurer.?

West End and Montpelier Re each put $10 million into the new Cayman Island?s venture, while five unnamed investors contributed the balance of Rockridge?s $90.9 million capitalisation.

West End said it will use a fixed income arbitrage approach to manage Rockridge?s investment portfolio. The reinsurer could open up to more investors in January, depending on market conditions. West End also plans to move ahead with its Japanese fund towards the end of 2005, or early in 2006, said Mr. Slade.

Katrina?s final toll on hedge fund reinsurers will depend largely on what the final insured loss total adds up to, and if they sold policies in the Gulf Coast region.

Rockridge Re, as a fledgling three month-old company that only sells policies to part-owner Montpelier Reinsurance, won?t face Katrina-related claims because it hadn?t sold any policies in that region, according to a West End official yesterday.

Rockridge, like a number of other property-catastrophe reinsurers, sells reinsurance for high-layer, short-tail risks. A high-layer reinsurance policy is only triggered if claims from an event reach a specified multi-million dollar threshold. In general, the likelihood of reinsurance claims reaching such high levels, with any regularity, are slim.