Growing concerns over the current hurricane season have negatively impacted returns at catastrophe bond hedge fund Fermat Capital Management, with the Swiss Re Global Cat Bond Performance Index returning 5.8% in H1, down from 10.5% in the same period last year, according to a report by Bloomberg.
The report cites, Brett Houghton, Managing Director at the $9.5bn firm, as saying in a recent interview that returns in May were particularly weak, with many funds experiencing negative performance due to selling pressure in the secondary market fuelled by fears of a severe hurricane season.
The catastrophe bond (cat bond) market, after enjoying over 18 months of consistent gains, experienced a selloff in the second quarter, with investors spooked by meteorologists’ predictions of an exceptionally active hurricane season. In May, the Swiss Re index fell by 0.5%, marking its first monthly decline since Hurricane Ian struck in September 2022.
Despite the recent turbulence, cat bond investors have so far avoided significant losses. Hurricane Beryl, which impacted the Caribbean and Texas last month, did not reach the specific air pressure levels required to trigger payment clauses, sparing investors from covering losses.
Cat bonds are issued by insurers, reinsurers, and governments seeking extra protection against extreme weather events like catastrophic hurricanes. These bonds offer the potential for high returns if predefined disasters do not occur, but they also carry the risk of substantial losses if triggered.
In 2023, cat bonds were the top-performing hedge fund strategy, with insurance-linked securities (ILS) delivering over 14% on an annualised basis, according to Preqin data. However, the strategy has since slipped in the rankings, now placed eighth for the 12-month period ending 30 June.
Despite the decline, ILS still generated a cumulative return of 12%, while the top-performing “opportunistic” strategy delivered 19%.
