September 08, 2006

Hedge Fund Hurricane

Hedge funds are embracing the risk of catastrophe bonds, as insurers sell more of the securities to protect themselves from increasingly unstable weather triggered by global warming. After seeing yields of 40 percentage points more than investment grade debt, investors predicted that sales of catastrophe bonds might triple to $4 billion this year.

Hurricane Katrina produced record claims of more than $90 billion last year. A catastrophe bond is high yield debt instrument that usually pays higher yields because investors may lose their entire stake in the event of a disaster. It is usually insurance linked and can raise money in case of a catastrophe such as a hurricane or earthquake.

Read my previous post titled “Hedge Funds Can Protect Savings” to know more about hedge fund benefits.

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