BOSTON / NEW YORK (Reuters) - Investor Dan Loeb is setting up a new reinsurance firm in Bermuda, becoming the latest hedge fund manager to jump into the business of underwriting risk.

Loeb, who runs the $7.9 billion hedge fund Third Point LLC, told investors yesterday that he is founding Third Point Re on the Island, said two people familiar with his plans.

Loeb, whose strong returns over the last 16 years have made him a darling in the $2 trillion hedge fund industry, will be one of the new reinsurance company’s initial investors. Private equity firms Kelso & Co and Pine Brook Partners are joining him as initial capital investors.

Dowling Capital Partners, a private equity firm that invests in insurance and related services and distribution companies, also put in money, the people familiar with the matter said.

A spokeswoman for Third Point declined to comment on the matter.

Talk that Loeb might be preparing to jump into the reinsurance business began circulating late last week after John Berger, a prominent industry executive, left his position to join a new entity called ‘Third Point Re’.

Bermuda-based Alterra Capital Holdings said in a regulatory filing last week that Berger, CEO of its reinsurance business, had resigned.

Now he will work for Loeb, who is joining other prominent hedge fund managers in the growing reinsurance industry.

Essentially reinsurers act as a safety valve for insurance companies where an insurer pays a reinsurer to cover part of its losses between certain thresholds.

For example, an insurance company that does business in Florida might have reinsurance against hurricane losses.

Prominent hedge fund managers like David Einhorn, Kenneth Griffin and George Soros have all been involved in reinsurance over the last years.

Hedge fund managers are used to taking big risks, but they also need generous amounts of capital to do so. For them the move into the reinsurance business is becoming a popular way to provide another source of investment capital.

Since its launch, Third Point has boasted an annualised return of 22 percent to rank among the best performers in the hedge fund industry. This year, Loeb, known both for his blunt language and a talent in reading markets and balance sheets, is up roughly four percent in his flagship Third Point Offshore Fund, people familiar with the numbers said. Loeb has often been at the forefront of new trends and was quick to revamp his portfolio this summer, adding the safety of gold as Europe’s debt crisis simmered and a battle erupted over the US debt ceiling.