Cat bond activity may give multi-strategy funds room to expand

The acceleration of activity in the global catastrophe bond market over the last few months could now drive an opportunity for a number of multi-strategy investment funds to expand, as the availability of paper has increased even causing some investment managers to lift the shutters on closed funds, we understand.

Which could drive more capital to look at catastrophe bonds and perhaps other insurance-linked securities (ILS), or the more structured collateralised reinsurance opportunities such as sidecars.

Given a lot of the multi-strategy investment funds that look at cat bonds and other ILS are open to retail money as well, these investment managers would really like to see listed opportunities, or assets with greater liquidity, which could even drive interest among specialist ILS managers or reinsurance firms to revisit the listed fund strategy again.

We’re told there has been more cat bond investment activity from multi-strategy funds in the last two months, as accelerated cat bond issuance provided more paper and chances to allocate to the sector.

Now global asset management firm Baillie Gifford has said it is reopening one of its multi-asset class diversified strategy funds as depth has increased in some core alternative markets.

The Baillie Gifford Diversified Growth Fund has allocated directly to catastrophe bonds in the past and still holds a number in its portfolio, so this could be an area of renewed opportunity for the investment manager and its clients.

Baillie Gifford had pulled back from catastrophe bonds in the past, saying that it was unlikely to allocate much more to the asset class back in 2017 unless spreads widened.

Spreads are now wider, even with a little softening in recent months and certainly availability of opportunities to allocate to cat bonds has also increased, especially with the current quarter and half-year of 2021 on track to break records, if you factor in thee issued volume of all cat bond-like ILS deals.

Interest in alternative investments is on the rise, given global macro-economic conditions and Baillie Gifford is clearly aware and cutting management fees to access its Diversified Growth Fund to capitalise on this.

Which could also help it attract more inflows, meaning more assets will be needed to deploy this into, with catastrophe bonds perhaps an area to benefit from this.

When Baillie Gifford shuttered this multi-asset class fund before, it had cited the challenges related to the size of markets like insurance-linked securities (ILS) as one reason for this. So the expanding catastrophe bond segment may have been a consideration in its coming reopening from July 1st.

Multi-strategy fund managers had made up a smaller proportion of the global catastrophe bond market in recent years, as tighter spreads and competition from dedicated cat bond fund managers had made the assets less appealing.

But with spreads back at levels seen in 2019, or 2020 in some cases, the opportunity in the cat bond space and more generally in other structured reinsurance linked securities, may draw more of these investors back to the space in greater numbers.