This weekend Hurricane Irma is set to unleash hell over Florida, resulting in devastation and damages worth tens of billions of dollars… and many hedge funds are on the hook ahead of their own coming balance sheet “catastrophe.”
On Wednesday we reported that as a result of the imminent destruction to befall Florida, investors in catastrophe bonds – among them prominently one Stone Ridge Capital – could be facing a total wipeout on their investments (those unfamiliar with (Cat)astrophe bonds and Insurance-LInked Securities are urged to read the original article, especially since this will be a very prominent topic in the weeks to come). As a quick reminder, as their name suggests, catastrophe, or cat, bonds are a bet (by the buyer) that a catastrophic event such as a hurricane won’t take place, instead allowing them to clip 3 years work of generous coupons and get principal repayment at maturity; they are also a bet (or insurance) by the seller that a catastrophic event will take place, in which case the bonds contractually default, and as much as the entire principal amount could be forgiven.
In short, cat bonds are a form of securitized “reinsurance”, sold to hedge funds, catastrophe-oriented funds, and various other return-starved “alternative” asset managers and offer diversification as they are uncorrelated with other risks such as equity market risk, interest rate risk, and credit risk.
It will probably not come as a surprise to anyone, that the firm behind catastrophe bonds is, drumroll, Goldman Sachs:
This post was published at Zero Hedge on Sep 8, 2017.
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