Lombard Odier IM has launched LO Funds – CAT Bonds, a Ucits strategy that invests in catastrophe bonds targeting returns of LIBOR plus 2%-4%, net of fees and offering weekly liquidity.
The fund will be primarily exposed to regions with a high concentration of insured wealth, such as United States, Western Europe and Japan.
The strategy will be managed by a team led by Gregor Gawron. He is joined by Simon Vuille, Marc Brogli and Stephan Gaschen.
They use a proprietary approach aimed at optimising portfolios of insurance linked securities and targeting diversification across different risk types, and different regions.
Jan Straatman, chief investment officer of Lombard Odier IM, said: “Over the next few of years investors face enormous challenges with low economic growth, low yields and lots of volatility. We know our clients are looking for stable returns, income, capital preservation and lower correlation and traditional asset classes are not be able to deliver this.
“CAT bonds meet these criteria with a higher starting yield and floating rate coupon. They are uncorrelated to traditional economic and capital markets and their return profile is related to factors such as meteorological and geological events. CAT bonds also have low correlation to other asset classes. For example, adding a 15% cat bond allocation to traditional portfolios has reduced volatility and boosted returns over the last 15 years.”
Gregor Gawron, head of Insurance Linked Securities, added: “CAT bonds were created in the mid 1990’s, after a number of significant natural catastrophes pushed insurers and reinsurers to find new ways to protect themselves against major events.
“Today, financial markets have proven to be an efficient way for the insurance industry to manage regulatory capital requirements, particularly in the context of Solvency II. By investing in the asset class, investors can benefit from a diversified return stream which is not linked to the macro-economic environment, traditional financial markets, or the interest rate cycle.
“We expect the market for ILS and CAT bonds to continue to grow as the insurance industry looks to cope with the ever increasing concentration of wealth in urban areas and the continuing pressure from regulators.”
According to Bloomberg’s figures, the CAT bond market has been growing at an average of 20% per year since its creation. At the end of 2015, the market stood at $26bn.