Hedge funds active in the insurance-linked securities (ILS) space are increasingly adopting parametric insurance, a fast-growing niche that offers quicker payouts and fewer liquidity constraints than traditional catastrophe bonds, according to a report by Bloomberg.
Once limited to smaller players in emerging markets, parametric insurance – which pays out when specific weather thresholds are met – is now attracting interest from global corporates such as Sanofi, Liberty Latin America, and Greenbacker Capital Management. The strategy is being driven by climate change and the growing need to protect infrastructure and supply chains from increasingly frequent and severe natural disasters.
Lumyna-Twelve Capital has launched the first dedicated parametric ILS fund, attracting €85m in early capital with expectations to more than double that number next year. The Zurich-based manager says its goal is to outperform cat bonds, which were the top-performing hedge fund strategy of 2023, according to Preqin.
Key to the strategy’s appeal is the avoidance of ‘trapped capital’ – the long delays often associated with settling cat bond claims. Investors in parametric structures generally know within days whether a payout is triggered, providing welcome clarity and faster reinvestment potential.
The fund is supported by structuring partner Descartes Underwriting and insurer Generali, with backing from a top-tier European institutional investor. Still, managers caution that careful risk-reward analysis is essential, as the popularity of parametric products can ebb and flow with market conditions.
With global climate-related losses exceeding $6.6tn over the past 12 years, institutional interest in parametric cover is expected to continue climbing — offering hedge funds a timely and differentiated way to capture returns amid global volatility.
