Hedge Funds Hunt Deals in Risk Scenarios Too Costly for Insurers

As Los Angeles residents digested the apocalyptic scene left by wildfires earlier this year, the stage was simultaneously being set for hedge funds to pursue market-beating returns fanned by climate change.

The investment model in question is built around so-called subrogation claims, which are used by insurers to try to recoup some of the money they’ve paid out to policyholders. Insurers resort to subrogation when they suspect that a third party — a utility, for example — is ultimately responsible for the losses. But rather than deal with the recovery risk themselves, insurers have been selling those claims on to alternative investment managers.