This may be the wrong year to be buying cat bonds. More on that next week.
From Bloomberg, February 6:
- Mainstream investors drawn to market dominated by hedge funds
- Swiss Re cat bond index soared 20% last year, marking a record
As hedge funds rake in record profits in one of the riskiest corners of the debt market, the products behind those returns are now drawing in more mainstream investors.
Catastrophe bonds, which last year formed the basis for the best-performing hedge fund strategy, have been delivering gains that trounce those of other high-risk fixed-income products. In 2023, the securities soared 20%, compared with 13% for high-yield US corporate bonds. US Treasuries rose roughly 4%.
Niklaus Hilti, head of insurance-linked strategies at the investment arm of Credit Suisse, which is now part of UBS Group AG, says those eye-popping returns are feeding appetite for so-called cat bonds in circles beyond the domain of hedge funds.
“The interest has recently increased amongst institutional investors,” Hilti said. “Even if we believe that these returns won’t be reproduced in 2024, we think that small allocations to the asset class can make sense for investors in order to diversify investment portfolios.”
Catastrophe bonds are used by the insurance industry to shield itself from losses too big to cover. That risk is instead transferred to investors willing to accept the chance that they may lose part or even all of their capital if disaster hits. In exchange, they can garner outsize profits if a contractually pre-defined catastrophe doesn’t occur.
The cat bond market has existed for decades but has recently had a resurgence due to weather events fueled by climate change. Combined with decades-high inflation, which has added to the cost of rebuilding after natural disasters, cat bonds have attracted record levels of issuer and investor activity.
At the same time, some cat bonds have been written with tighter trigger clauses, an outcome that favors investors and cat bond funds because it reduces the likelihood of a payout.
Hedge funds that enjoyed bumper returns on cat bonds and other insurance-linked securities last year include Fermat Capital Management, Tenax Capital and Tangency Capital....
....MUCH MORE
Two truisms about Insurance Linked Securities/cat bonds/reinsurance:
1. The returns are what the academics call "lumpy."
2. A product for selling, not for buying. From a 2012 post:
....We had a few mentions of WeatherBill early in this blog's life but I couldn't figure out how to make money off their output, it looks like a product made for selling, not for buying....I purloined the "product made for selling, not for buying" bit from an insurance man who evaluated every insurance product on the basis of whether he would use it to insure his own business or if he would underwrite it for his agents to sell. A very handy mental map....
Recently:
January 21: "Hedge Funds Rake in Huge Profits Betting on Catastrophe Risk"
January 24: The Habitués Of London's Square Mile Like Them Some Catastrophe Bonds