Investigating the Securities Sea in recent years has led many to look for alternative investments. They have gone exploring in the Alternative Ocean, so to speak. They are looking for opportunities which provide acceptable returns that are uncorrelated with the movements in their main investment markets – common equity and corporate bonds. Real alternative investments are hard to find. They are not in abundant supply. The largest groups of alternatives are notinvestments themselves but methods of trading – via hedge funds, special algorithms, insights and high frequency procedures. Ideally these work whether or not the underlying market is moving up or down.
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Our purpose in this paper is to conduct an in-depth examination of the historical record of ILS investing and to reflect on the implications for future risk and returns.
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One month to the official end of the hurricane season (November 30) shows the distinct possibility of a “loss-free” catastrophe year. It’s not over ‘til it’s over, or the fat lady sings, but so far so good. US wind losses are the lowest since 2006. And, as our title reversing of the old English proverb indicates, a quiet season has benefited a lot of people.
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Genuine Alpha, Perfect Security – Reaffirming ILS Rationales
January, 2009
By: Morton N. Lane, President
“Alpha” is the holy grail of the conservative investor. Alpha expresses that part of an investment’s return that is not related to general market returns. Thus an investment that does not fall when the Dow falls (and vice versa) is said to have high alpha. It would be a valuable diversifying asset to reduce portfolio volatility. Regrettably, such investments (or asset classes) are hard to find. Insurance Linked Securities (ILS) are, however, thought to be one such class. This chapter surveys the ILS market, its history and the claim that it provides genuine alpha.
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The objective of this paper1 is to examine the risk preferences of property catastrophe reinsurers. It is an empirical exercise and is focused on catastrophe reinsurance, particularly of the Bermuda companies. It is also a speculative paper. It is not clear whether trying to infer risk preferences from operating results is even possible, especially when such results have very short histories, in most cases of less than ten years2.
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