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.
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Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall. Event-linked securities, otherwise known as Cat Bonds, are fixed income securities for which the return of principal and interest payment is contingent on the non-occurrence of a trigger event that leads to physical or economic loss. If the trigger event occurs prior to maturity, event-linked securities may lose all or a portion of their principal and additional interest. Diversification does not guarantee profit or protect against loss.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of the Portfolio Managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.