Hedge funds are facing political and regulatory heat in California over their involvement in wildfire-related subrogation claims, with state authorities accusing investors of exploiting catastrophe-linked insurance recoveries for profit, according to a report by Bloomberg.
The California Earthquake Authority (CEA), which oversees the California Wildfire Fund, has sharply criticised recent deals where hedge funds and private equity firms purchased subrogation rights from insurers following this year’s devastating Los Angeles wildfires. The CEA has labeled such transactions as “opportunistic, profit-driven investment speculation” and signalled plans to push back – potentially through the state legislature – against what it sees as “speculators” targeting billions in potential recoveries.
Subrogation claims arise when insurers seek reimbursement from third parties – such as utilities – deemed responsible for damages they’ve already paid out. With the causes of the Eaton Fire and Palisades Fire under investigation, and the service territory of Southern California Edison under scrutiny, hedge funds have been actively acquiring related claims at discounted rates in anticipation of sizeable legal settlements.
Despite the controversy, activity in the secondary claims market has remained brisk. Oppenheimer & Co executed over $1bn in wildfire-related subrogation transactions tied to the January fires, including $125m in claims traded in a single day. Meanwhile, Cherokee Acquisition, a specialist in distressed and legal claim investing, said it has facilitated deals on behalf of “larger, more sophisticated distressed debt hedge funds.”
But the CEA’s intervention has already impacted pricing. According to Bradley Max of Cherokee, bids for Eaton Fire-linked claims have dropped from around 50 cents on the dollar, softening in response to the state’s threat to block payouts. “This has definitely put a chill on bidding,” Max said, though transactions continue.
The CEA’s challenge underscores the tension between public policy and private capital in the wake of climate-driven disasters. While hedge funds argue they’re injecting liquidity into an undercapitalised insurance ecosystem, critics say the moves siphon funds away from the state’s wildfire compensation mechanism, which is funded in part by major California utilities, including PG&E, San Diego Gas & Electric, and Southern California Edison.
In a statement to regulators, Ronald Ryder, Co-Head of Special Assets at Oppenheimer, defended the role of institutional investors, stating that subrogation sales are increasingly necessary as insurers confront rising climate-related losses. “Recovery subrogation in the secondary market is a growing mechanism to fortify balance sheets,” he wrote.
Hedge fund interest in wildfire claims dates back to the landmark PG&E bankruptcy, where Baupost Group reportedly acquired $6.8bn in subrogation claims and profited handsomely—an early proof point for the strategy.
Now, with January’s Southern California wildfires projected to generate insured losses of up to $45bn, according to the CEA, this year’s catastrophe may become the most expensive wildfire event in US history – and the next major test of hedge fund-backed recovery strategies.
