Allocating to Cat Bonds

Investors considering an allocation to cat bonds need to understand their investment objectives, risk tolerance, and the role cat bonds would be expected to play in their overall allocation.

For example, some investors may be more interested in diversifying their fixed income portfolio, and reducing its correlation to assets such as high-yield bonds or loans.

Others may seek to integrate cat bonds into their alternatives allocation for the same reason. Some investors may consider a larger allocation to cat bonds within an alternative portfolio. However, they need to manage risk appropriately and be comfortable taking on additional tail risk in keeping with their risk/reward profile.

Disciplined portfolio construction and risk management techniques can be used to address the special risks associated with cat bonds, a strategy that could help improve returns over time.

The next video in this series will address how cat bonds have fared during default-triggering events.

Follow @OppFunds for more news and commentary.