The brisk pace of catastrophe bond issuance in recent months, which looks set to help the market achieve new records in terms of activity and scale by the end of this quarter, has helped some ILS fund managers to open the gates on cat bond strategies a little, as a number offer new subscription opportunities.
Many catastrophe bond funds have been gated for some time, with managers protecting the returns for existing investors by shuttering off access to new investors.
Some of these cat bond funds have taken the occasional inflow from an existing investor base as opportunities allowed, but in recent years many of them have been virtually static a lot of the time.
Now, we understand that a number of cat bond funds have opened back up to investors in some way. More ILS fund managers are considering whether the market growth seen across this year so far, despite the record levels of maturities, could enable them to let at least some level of new allocations in, we understand.
The Twelve Falcon Insurance-linked strategy fund, which invests in catastrophe bonds only, has opened up to new subscriptions to fill some gaps created by maturities and the like, we understand.
We’re told that two more cat bond funds have taken on new investors in the last month, albeit small and highly selective at this stage.
It’s a positive sign though, as ILS fund managers would dearly like to grow their cat bond strategies if market activity allowed.
Not all ILS fund managers will be able to do this though, as the very large cat bond fund strategies might find it is just not worth the effort for the small size of allocation that issuance would allow them to make.
Cat bond fund managers have to be careful when allowing new capital into their funds, as they do not want to be forced to take on more risk than they need, nor do they want to affect the diversification and peril weighting of their cat bond strategies.
Hence, a number of the largest UCITS funds, think Fermat Capital managed GAM Star Cat Bond Fund and Schroders GAIA Cat Bond strategies, are not opening their gates just yet.
This is likely due to their size, which makes allowing meaningful new allocations more difficult. However the GAM Star cat bond fund is offering some limited capacity, we hear, although we understand this is on a first come first served basis and there is often a waiting list.
Other managers of UCITS funds have been able to take some small allocations in recent months, such as Leadenhall whose UCITS cat bond strategy has grown to around $180 million in size we understand, adding around $20 million in recent months.
It’s a positive sign for the market though, as it confirms that the levels of issuance seen in recent weeks can be absorbed by the market.
In fact, if the levels of issuance seen through the first-half continued into the second, it’s fairly certain that ILS fund managers and other asset managers would happily soak up all the catastrophe bonds made available.
At this stage though, despite the fact cat bond issuance is on course for a record first-half to the year in 2017, it still hasn’t been sufficient to enable all of the fund managers to open their strategies to new investors. It’s perhaps not so much a swinging open of the gates, as leaving them slightly ajar at this point in time.
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