The Fundamentals of Catastrophe Bonds
Here we review how cat bonds work and describe the potential opportunity they may offer to investors.
November 11, 2016
A strategy that invests in global catastrophe-bond-insurance-linked securities, primarily found in the Swiss Re Global Cat Bond Total Return Index.
The portfolio manager seeks to benefit from inefficiencies in the catastrophe bond market arising from structural complexity, illiquidity and concentrated risks by combining a highly specialized quantitative portfolio management process with intensive credit analysis to identify and analyze cat bond issues that can deliver a value-added risk-return profile.
The strategy seeks a high level of current income and typically invests in global catastrophe bond insurance-linked securities, primarily found in the Swiss Re Global Cat Bond Total Return Index. The portfolio manager uses quantitative portfolio construction to manage the complex risks of cat bonds. A proprietary risk measurement and optimization model is deployed to generate a model portfolio, which provides guidance to the portfolio manager on positioning towards the range of peril exposures in the cat bond universe. The manager seeks competitive risk and return attributes similar or better than the loss profile to the Index.
In selecting securities to bring the portfolio’s peril allocations to its targets, the manager uses comprehensive and disciplined credit analysis to identify which bonds to purchase or sell. A risk measurement model is then utilized to steer the portfolio towards appropriate risk positioning to the Index in terms of diversification and peril loss exposure.
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Caleb Wong is a portfolio manager of the Cat Bond strategy, Oppenheimer Global Multi Strategies Fund and a co-portfolio manager of Oppenheimer Portfolio Series: Active Allocation Fund. Previously, Mr. Wong was the chief quantitative investment strategist for the Firm’s fixed income department and was responsible for the assets managed quantitatively across a number of the Firm’s products.