The lackluster performance of hedge funds has also had a negative affect on institutional investors, specifically insurance companies. Publicly traded insurance concern Max Capital Group said its overall investment portfolio for the third quarter fell 2.85%, leaving it down 2.19% for the year.

Specifically, Max Capital’s loss on its alternative investments is expected to be 12.93% for the quarter and 11.97% for the year. The company’s alternative investments represented approximately 20% of its total invested assets of approximately $5.2 billion as of the end of June.

As a result, Max Capital said it has decided to reduce its allocation to alternative investments to 10% to 20% of invested assets from the 15% to 25% current range. In addition, the company plans on increasing the number of strategies employed and managers within the alternative investment portfolio, employing a less volatile, more market neutral benchmark to monitor risk and measure relative returns, and reduce exposure to the asset class over the next two quarters to the mid-point (15%) of the its new allocation.

“Worsening market conditions—third quarter hedge fund returns were the worst since benchmarking became available—necessitated an acceleration of that review, and we initiated a series of fund redemptions in the third quarter of 2008 to rebalance our portfolio in accordance with our updated investment strategy,” said Marston Becker, CEO of Max Capital.