What catastrophe bonds can add to your portfolio

FIXED INCOME

John Seo, co-founder and managing principal at Fermat Capital Management, and manager of the GAM Star Cat Bond fund, outlines the drivers behind this alternative fixed income asset class.

In a world of specialist asset classes whose ‘alternative’ status is undermined by correlations with other risk assets, catastrophe bonds offer diversification on a fundamental level. Because their pricing is not driven by economic or corporate events, catastrophe (cat) bonds have very low correlation to mainstream markets. Correlation between cat bonds and global government bonds has been only 0.13 and correlation to global equities has been 0.17, both measured since the launch of the Swiss Re BB Rated Cat Bond index in January 2002. Moreover, cat bonds typically offer higher yiel...