Private ILS funds outpace cat bonds, as spread widening dents April return

The effects of spread widening in the catastrophe bond market are now evident in the performance of the Eurekahedge ILS Advisers Index for April 2024, as private ILS funds outpaced cat bond strategies for the first time this year.

Despite the spread widening though, the Eurekahedge ILS Advisers Index that tracks a basket of catastrophe bond and insurance-linked securities (ILS) funds still delivered a positive return of 0.51% for the month of April.

That takes the year-to-date return for the ILS fund index to 3.60%, for the first four months, which is still the third best start to the year since the Index began tracking the market in 2006.

Even with the widening of cat bond spreads, the majority of pure catastrophe bond funds still delivered positive performance for the month.

While the Swiss Re cat bond price index fell 0.58% in April 2024, the total return index still delivered a +0.57% positive return.

As a result, pure cat bond funds tracked by the Eurekahedge ILS Advisers Index were up by +0.40% for the month of April, but private insurance-linked securities (ILS) funds that invest in collateralized reinsurance as well rose faster at +0.60%.

One catastrophe bond fund out of the 27 ILS funds tracked by the Index fell to a negative return, with the other 26 ILS funds all delivering another positive month.

The range of performance across the 27 ILS funds was from -0.05% to as high as +1.51% for the month of April 2024.

May is likely to be another month where catastrophe bond performance suffers due to the effects of the spread widening that has been seen.

As we’ve reported, the effects of the spread widening has been to enhance the cat bond market yield, resulting in an attractive entry point for ILS investors.

ILS Advisers highlights the fact that the spread widening has been in part blamed on an update to the RMS hurricane risk model, as we’ve reported.

But the firm also explains that, “However, markets did not react last year after the competing AIR/Verisk model update resulted in similar loss increases.”

Adding that, “The latest hurricane forecasts, net new supply and seasonal effects may also have played a role.”

You can track the Eurekahedge ILS Advisers Index here on Artemis, including the USD hedged version of the index. It comprises an equally weighted index of 27 constituent insurance-linked investment funds which tracks their performance and is the first benchmark that allows a comparison between different insurance-linked securities fund managers in the ILS, reinsurance-linked and catastrophe bond investment space.