Cat bond funds buck the UCITS trend, growing as sector saw $38bn outflows: Kepler

Catastrophe bond funds were a bright spot in the alternative UCITS investment fund space in 2023, as cat bond funds expanded strongly at a time when the wider UCITS segment experienced approximately $38 billion in outflows, according to Kepler Absolute Hedge.

As we reported back in January, our tracker of UCITS catastrophe bond fund assets under management displays a year with very strong asset growth for these insurance-linked securities (ILS) strategies.

In fact, the UCITS cat bond fund sector experienced very impressive growth in 2023, with in assets across the full-year rising 25%, or just over $2.16 billion growth in dollar terms.

Kepler Absolute Hedge, a research and data-led provider of insight into hedge fund strategies, highlighted the catastrophe bond market as one segment that didn’t suffer the outflows seen more broadly in UCITS strategies.

While the outflows did stabilise as 2023 went on, with funds only losing ~$2 billion to outflows in Q4, according to Kepler, the cat bond fund market’s growth accelerated at that time of year, with UCITS cat bond funds adding a further 10.5% in assets, or almost $1.04 billion during the fourth-quarter of 2023.

The catastrophe bond fund sector was an exception, in experiencing what Kepler called “notable” inflows in Q4 2023.

The fact catastrophe bonds are floating rate instruments, so investors benefit from a roughly interest-rate linked return on collateral, as well as the return on insurance risk assumed, appeared to be a benefit to the sector, as other alternative asset classes suffered as investors went elsewhere given the higher interest rate environment.

Of course, cat bonds were also delivering their best year’s performance on record in 2023 as well, making the asset class particularly attractive to investors.

Matthew Barrett, Partner and Head of Manager Research at Kepler, commented, “2023 presented a mixed picture for the Alternative UCITS sector; the flows backdrop was challenging, with outflows across all strategies, however some individual funds garnered significant inflows, and there were several successful new fund launches.

“We have tracked the Alternative UCITS sector since its infancy, and what we see today marks the ongoing maturation of the asset class as it continues to offer investors attractive diversification opportunities amid market turbulence.”

With UCITS funds remaining a core structure for many investors and catastrophe bond funds having delivered record returns in 2023, the strong interest and inflows are likely to continue, as long as the supply of cat bonds can keep up through 2024.

Analyse UCITS catastrophe bond fund assets under management using our charts here.

You can also analyse UCITS cat bond fund performance, using the Plenum CAT Bond UCITS Fund Indices.