Hedge-fund reinsurers may face an uncertain future in a sector already crowded with players and facing challenging conditions, according to a report released Monday by S&P Global Inc.

“The allure of a crossover between hedge funds and reinsurers continues to offer enticing possibilities,” S&P say in its new report, “The Rubber Meets the Road for Hedge Fund Reinsurers,” but “the multibillion-dollar question remains, How viable and sustainable is the HFR model?”

Such reinsurers generally engage in “low-margin and low-volatility (property/casualty) reinsurance business,” and try to generate returns for investors through hedge fund investment or other strategies.

Thus far, however, they “have yet to generate an underwriting profit and their overall operating results continue to lag those of the traditional Bermudian reinsurers,” the S&P report said.

The fund reinsurers’ strategy is a half success, as they outperform traditional reinsurers’ investment record. This is still not enough to offset underwriting losses, says S&P, leaving the fund reinsurers trailing their more established brethren in total return.

“Investment returns is one area where the HFRs surpass the traditional Bermudian reinsurers. During the past three years, 2014-2016, HFRs (hedge fund reinsurers) generated an average net investment return of 10% compared with 2.1% for the traditional Bermudians. However, the (hedge fund reinsurers’) HFRs' investment returns' outperformance did not totally offset their underwriting losses, as their three-year average return on equity of 3.9% significantly trailed the traditional Bermudian reinsurers' 9.8%,” the report said.

The report draws a distinction between what it calls "stand-alone HFRs," which operate without a reinsurer sponsor; and "sponsored HFRs," which have a reinsurer sponsor that generally carries a strong financial strength rating.

Sponsored entities have fared better than their counterparts and carry some advantages, said S&P.

"We believe that sponsored HFRs have typically outperformed stand-alone HFRs and are better placed at least to break even from an underwriting perspective,” S&P Global Ratings credit analyst Taoufik Gharib said in a statement accompanying the report.

The fund reinsurers have issues to resolve but will continue to play a role in the reinsurance sector, S&P said.

“We continue to believe that HFRs need to focus as much on the additional risks of their overall strategies as they do on the higher investment returns,” S&P said, adding that “HFRs will continue to evolve, learn from their earlier brethren's mistakes, and nibble at the edges of the reinsurance market as they carve out a niche for themselves.