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ESG: Hedge Funds’ Mega Returns Set Off Demand Spiral for Catastrophe Bonds

ESG: Hedge Funds’ Mega Returns Set Off Demand Spiral for Catastrophe Bonds

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.



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