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Pillar Capital Management – Best Insurance-Linked Securities Hedge Fund

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Pillar Capital Management (Pillar) was founded in 2008 and is headquartered in Bermuda. The firm manages open-ended Bermuda incorporated funds invested in the global property catastrophe risk market. 

The senior management team at Pillar, headed up by CEO and CIO, Stephen Velotti (pictured), has an average of 25 years’ experience in the reinsurance marketplace. 

Pillar Capital is focused on providing alpha to investors through the reinsurance space. It aims to provide an attractive yield for investors while managing the risk it takes to achieve its returns. 

Discussing the ILS market in 2018, Velotti notes that 2018 was the second year in a row with above average catastrophe losses. The market reacted well, he says, as prices rose across much of the industry. These increases were mainly focused in the sections of the market that were affected by the events of 2017 and 2018. 

“Regarding alpha generation, 2018 saw another year of very disparate performance across the industry,” states Velotti. “Disparities between good performance and poor performance were as high as 40 per cent. The better performing Funds have grown and the poorer performers have shrunk. Investors are starting to understand that not all ILS managers are created equal.”

Pillar has built a culture of risk management, at the heart of which is a commitment to capital preservation. When the industry experiences a benign catastrophe year, most managers in the space will provide reasonable returns to their investors even though they may not have done anything specific to deserve it. 

“It is those years with above average catastrophe activity that provide differentiation,” says Velotti. “Pillar’s culture is to control the large drawdowns. We can’t avoid a drawdown but we look to minimise it after a large catastrophe event. Assuming you get the risk assessment reasonably correct, the portfolio should make returns over time.”

Some of the biggest ILS Funds were the worst performers in 2018 and while the Eurekahedge ILS Advisers Index (which is not a market cap-weighted index) was down -2.98 per cent, the overall returns for the industry were most likely materially worse. 

Velotti says that managing downside risk in the portfolio can be done via diversification (through territory, peril, and time) and hedging but “managing risk does not mean avoiding claims”. 

“Catastrophe events are going to occur and when they do, you want to limit drawdowns. Pillar has limited the drawdowns over the past couple of years by aggressively diversifying the portfolio as well as employing a comprehensive hedging program,” Velotti asserts. 

Although one would think back in 2016 that hurricane risk in Florida, for example, was on the decline, having not seen a hurricane reach its shoreline since 2005, the last two years has been a different story, with multiple hurricanes hitting the area. Velotti says the truth lies somewhere in the middle, in terms of real risk. 

“Over the last 30 years, landfalling hurricane activity has trended essentially flat, while losses from other perils such as California wildfires have been on the rise the past few years. However, much of this wildfire increase is man-made and not necessarily climate induced, exasperated by societal issues. 

“Regardless of causes, identifying these trends and adjusting your investment process is key to pricing transactions appropriately. Climate change is happening and it’s the Manager’s job to anticipate and adjust accordingly,” explains Velotti.

On winning this year’s award, he concludes: “We have very experienced personnel at Pillar. Winning this award was a team effort with everyone contributing to the excellent result.”

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