Diversification with Cat Bonds?
Harvesting insurance premiums
October 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Investors can now access catastrophe bonds through mutual funds and ETFs
- They have offered impressive returns with minimal drawdowns
- However, they are more correlated with equities and bonds than often assumed
INTRODUCTION
The ETF universe continues to broaden, now covering nearly every conceivable investment strategy. In 2025, another niche product was launched: the Brookmont Catastrophic Bond ETF (ILS), offering investors direct exposure to catastrophe (“cat”) bonds (read Avoiding Disasters with Catastrophe Bonds?). The fund seeks to deliver positive, uncorrelated returns – the very attribute often promised, but rarely achieved, by many alternative strategies such as hedge funds.
In Europe, mutual funds dedicated to cat bonds have been available for over a decade. However, their relatively high minimum investment thresholds have limited access to larger institutional investors. Still, their track records provide a valuable basis for assessing whether cat bonds have indeed delivered on their diversification and return promises.
PERFORMANCE OF CAT BOND FUNDS
We focus on catastrophe bond mutual funds available to European investors, which offer track records extending back to 2011. These funds have delivered remarkably steady returns, with no single calendar year posting a loss on composite level. Notably, the sharp equity market declines during the COVID-19 crisis in 2020 left hardly a trace, suggesting diversification potential of cat bonds.
Across the seven funds examined – several managed by the same asset managers – performance has been strikingly similar. Returns and drawdowns have aligned closely, particularly in stress years such as 2017, when Hurricanes Harvey, Irma, and Maria caused major losses in the United States, and in 2022, when Hurricane Ian devastated parts of Florida. This suggests that the funds hold broadly comparable underlying cat bond portfolios.
