Fermat Capital Management says a European proposal to limit retail investors’ access to catastrophe bonds faces serious pushback, as money managers specialized in insurance-linked strategies mount a coordinated front.
John Seo, co-founder and managing director of the Connecticut-based hedge fund manager, says he’s been working with others in the industry to try to shield the market for cat bonds from the disruption he worries would follow such a regulatory intervention. He also says investors would ultimately find ways to work around stricter rules.
“We’ve been heavily involved in the industry responses and coordinated with our peers in the industry to consolidate our stance,” he said in an interview. So “we’ve been very actively involved in all this.”
Read more: Catastrophe Bonds Worth $17.5 Billion Land in EU Crosshairs
At issue is a proposal by the European Securities and Markets Authority that the European Commission limit the extent to which highly complex instruments such as cat bonds be included in UCITS, which is a fund category intended to protect retail investor interests. The recommendation, if acted on by the EU’s executive arm, would have major ramifications for the $60 billion market for cat bonds, of which UCITS funds currently account for almost a third.
“This is frankly an unprecedented thing, if it were to occur,” Seo said. Fermat, which has about $11 billion in assets, is the world’s biggest hedge fund manager focused on catastrophe bonds.
The extent to which retail investors should be exposed to complex, niche markets more broadly is a question that’s drawn renewed focus of late. Through exchange-traded funds and business development companies, for example, retail investors have increasingly been gaining access to markets that were traditionally the preserve of professionals.
In some cases, strains are emerging. In less liquid private market funds, there are examples of investors getting burned as financial firms impose caps on redemptions and even gate funds.
Seo says he’s aware that “it may sound scary talking about catastrophe bonds” just because the “very term itself” conjures up catastrophic scenarios.
“But the actual risk is among the most transparent and easy to understand for the end investor,” he said. “So there’s no mystery to it.”
