Institutional investor interest in catastrophe bonds, one of the riskiest corners of the debt market, is on the increase on the back of reports of record returns at hedge funds including Fermat Capital Management, Tenax Capital and Tangency Capital, according to a report by Bloomberg.
The bonds, which are used by the insurance industry to shield insurers from losses too big to cover, have been delivering gains way in excess of other high-risk fixed-income products. In 2023 they soared 20% compared with 13% for high-yield US corporate bonds, while US Treasuries rose by roughly 4%.
The report quotes Niklaus Hilti, Head of Insurance-Linked Strategies within the investment arm of Credit Suisse, which is now part of UBS Group, as saying that those big returns have piqued the interest of investors outside of the hedge fund sector.
“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.”
