UBS to marginally increase cat bond allocations, says remain attractive on relative basis

In a volatile market environment when some hedge fund and alternative strategies have suffered, UBS Asset Management’s team sees catastrophe bonds as one asset class worth increasing allocations to, given it the carry they can provide remains relatively attractive compared to other investments in credit and fixed income.

The UBS Unified Global Alternatives team, which also houses hedge fund solutions and allocations to third-party managers, has been particularly active through recent years in adjusting client and strategy portfolios to take advantage of opportunities across investment asset classes.

The team has been allocating to reinsurance through catastrophe bonds and other types of private insurance-linked securities (ILS) for some time, finding the relatively uncorrelated returns appealing for its clients, while also seeing the asset class as one it had high conviction on during the period of very high spreads and returns.

In 2024 and 2025 the UBS Asset Management hedge fund team had given reinsurance and ILS investments a 3% of portfolio weighting, but that was pared back to a 1% forward looking target weight at the beginning of 2026.

While that 1% forward looking target weight for reinsurance, cat bonds and ILS remains in place for the third-quarter of the year, the asset manager sees catastrophe bonds in particular as worth increasing.

The UBS Unifed Global Alternatives team explained, “In Credit / Income, we plan on marginally increasing allocations to corporate long / short. We continue to focus on trading-oriented managers who could benefit from higher market volatility and rising dispersion, particularly given record tight spreads.”

Adding that, “For more neutral portfolios, we plan to marginally increase our allocations to catastrophe bonds within Reinsurance as they remain attractive relative to most carry strategies.”

Which at this stage of the cycle when catastrophe bond pricing has normalised towards more average historical levels, is a real signal of the quality of the returns that are still possible from the asset class, particularly when considered on a relative basis to other comparable asset types.

For large investors and institutions, having a sleeve of their portfolios devoted to reinsurance and catastrophe bonds, or other ILS strategies, can bring diversification benefits and a return-stream that is relatively uncorrelated to almost everything else they invest in, as well as a source of valuable carry generated by holding these assets over time.

With cat bonds and other ILS that have their collateral invested in risk free assets such as US treasuries as well, they can provide an element of risk-free return that tracks certain broader macro trends too, which is on investors minds at this time given government bond activity around the world.

While broader macro trends can also drive risk asset returns, an ILS or cat bond allocation can be a valuable complement with a differentiated return profile, something the UBS team clearly appreciates.

The UBS team also noted that carry-oriented income and credit assets have been a driver of positive returns in recent months, so it’s encouraging to see that the one area they aim to increase is catastrophe bonds.