First off we’ve been negligent in not mentioning the ground zero equivalent of blog a palooza in the Rising Tide Conference to be held this week in New Orleans. From the looks of the promo this event will be attended by all the finest cyber movers and shakers including our good friend Editilla from the Ladder.
Speaking of Editilla he spoiled us by finding and posting links to several more articles on Cat Bonds today including this entry from the Bull Bear Trader Blog which describes their growing popularity. Now that mortgage backed securities are out of style it seems hedge funds have found the latest investing fad:
For those unfamiliar with catastrophe bonds, they are similar to normal bonds in that you invest a principal in return for periodic coupons. Once the bond matures, you receive your principal back – hopefully. As with other bonds you have the risk of losing your principal, but for cat bonds it is less about credit risk, and more about catastrophic risk. In most cases this is a binary proposition. If there is no event, you get all your money back. If there is an event, you do not get anything back. In return you get a nice coupon to compensate for the risk you are taking. Cat bonds have returned over 33% from 2005 to this May, ahead of the 19.1% offered by the Lehman High Yield Corporate Bond Index over the same time frame. After Hurricane Katrina one cat bond tranche was offered by Swiss Re with an annual coupon of near 40%. An additional benefit of cat bonds, beyond the high yields, is that their returns are often uncorrelated with the returns of other equity or fixed income investments, providing another vehicle for diversification. Continue reading “A Couple of Odds and Ends”