Hedge funds that bet on catastrophe were top performers of 2023

Hedge funds investing in catastrophe bonds and insurance-linked securities like Tenax Capital, Tangency Capital and Fermat Capital Management outperformed last year as a record $16.4 billion worth of catastrophe bonds were issued in 2023.

These bonds gained historic returns (14%) for the hedge funds that were more than double an industry benchmark.

Strategic bets pay off
The key to these exceptional returns lay in strategic investments in cat (short for catastrophe) bonds, a type of insurance-linked securities that lets an insurer pay the issuer collateral to be used when a predefined disaster risk is realized.

But the collateral is returned, along with any interest earned, if the disaster doesn’t occur.

Catalyst: Hurricane Ian
The catalyst for this surge was Hurricane Ian in September 2022, the most destructive storm in Florida’s history, causing $100 billion in losses, of which only 60% was insured. 

This led insurers to shift more risk to the capital markets, setting the stage for a robust catastrophe bond market.

The strong performance was followed by a challenging 2022 due to market turbulence from the Ukraine war and Federal Reserve rate hikes.

According to experts, the cat bond market is expected to expand beyond hurricanes to include wildfires and cyberattacks.