NEW YORK, Feb 17 (Reuters) - PXRE Group Ltd. (PXT) shares lost 65.9 percent of their value on Friday after surging hurricane losses led to several credit agency downgrades that raised questions about the reinsurer's ability to manage risk.

Hedge funds may have contributed to the slide. The funds, led by D.E. Shaw & Co. and Eton Park Capital Management LLC, constituted eight of PXRE's 10 largest shareholders at year end, and own about half its shares, Thomson ShareWatch said.

PXRE shares fell $7.84 to $4.05 in Friday trading. They earlier fell to $3.88, the lowest since the shares began trading on the New York Stock Exchange at the end of 1996.

Hamilton, Bermuda-based PXRE on Thursday raised its estimate of pretax losses from Hurricanes Katrina, Rita and Wilma by $281 million to $311 million.

The increase equates to 64 percent to 71 percent of shareholder equity as of Sept. 30. Most large insurers' and reinsurers' hurricane losses were smaller in percentage terms.

PXRE now expects hurricane losses of $758 million to $788 million, as much as 71 percent higher than its prior $462 million to $477 million forecast.

A.M. Best Co., Moody's Investors Service, Standard & Poor's and Fitch Ratings downgraded PXRE. None still rate its financial strength in the "A" category.

In light of the downgrades, PXRE said it hired the investment bank Lazard to explore strategic alternatives.

"Some industry players would prefer only to do business with companies with a rating in the 'A' category," said Steven Ader, an S&P director, in an interview.

PXRE provides reinsurance to other reinsurers, which in turn provide coverage to insurers, Ader said.

"That makes it more difficult to estimate hurricane losses relative to other reinsurers," Ader said. "In our opinion, they should have been closer."

PXRE chief executive Jeffrey Radke said his company performed well during the January policy renewal season. He said this should help PXRE to "continue trading with many of our clients and brokers without ratings in the 'A' range."

Shaw and Eton Park did not immediately return calls.

PXRE's 8.85 percent trust preferred securities fell 19.2 cents on the dollar to 83.3 cents, pushing thier yield to maturity up to 10.90 percent from 8.51 percent, according to NASD bond pricing service Trace.

DOWNGRADES

A.M. Best downgraded PXRE's financial strength rating to "B++ (Very Good)" from "A-minus (Excellent)," with a negative outlook. It lowered the company's senior unsecured debt to "junk" status, to "bb" from "bbb-minus."

S&P cut PXRE's financial strength to "BBB-plus" from "A-minus" and its senior debt to "BB-plus," a junk grade, from "BBB-minus." Moody's cut PXRE's financial strength rating to "Baa2" from "Baa1." Fitch cut it to "BB-plus" from "BBB-plus."

All three agencies said more downgrades are possible.

Moody's senior analyst Pano Karambelas in an interview: "In general, purchasers of reinsurance would consider the confluence of news of storm losses, and its potential impact on ratings and a company's health, in purchasing decisions."

He added: "As a result of the losses, we will be reviewing the company's risk management practices."

Ader said, though, that PXRE's survival is not in doubt.

"To say PXRE's business is finished, in our opinion, is far too premature," he said. "They are a viable entity at the investment-grade level."