Catastrophe bonds, a form of insurance-linked investment (others might gain exposure to areas such as life settlements), are, according to one definition, high-yield debt instruments that is usually insurance-linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. It has a special condition that states that if the issuer (insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either deferred or completely forgiven.

“Investors face multiple challenges that are tough to reconcile: low growth, zero interest rates and valuations getting stretched.  Institutions can find themselves lured into taking more risk without getting the returns expected. We need to help clients increase returns while safeguarding capital and that means better building blocks for portfolios.  CAT bonds possess those qualities.”

The ILS team will use an approach aimed at optimising portfolios of insurance-linked securities and targeting maximum diversification across different risk types, and different regions, the firm stated. The ILS/CAT Bond boutique will expand LOIM’s high conviction fixed income range.

“In the next couple of years, fixed income will be more volatile and subject to rising rates. It will be crucial to add active and high conviction strategies which protect clients better against rising rates, instead of the traditional market cap based strategies. CAT bonds can meet these criteria with a higher starting yield and floating rate coupon,” added Straatman.

Lombard Odier Investment Managers managed $49 billion on behalf of clients at the end of 2014.