In 2012, Eurekahedge, a market leading alternative fund data provider, launched a new hedge fund index focusing on insurance linked securities (ILS), in partnership with ILS Advisers. Two years after the successful launch of the 'Eurekahedge ILS Advisers Index'; the first index tracking the performance of 32 funds investing exclusively in insurance risk, Eurekahedge together with ILS Advisers announced today the release of a USD hedged version of the benchmark.
The index was incepted in December 2005 and has returned 71.27% through January 2014. The index has an annualised return of 6.88% and an extremely low volatility, producing one of the highest Sharpe ratios of all of Eurekahedge indices at 2.17. The index boasts an impressive risk-reward profile in comparison to alternative investment vehicles and other asset classes as illustrated in the figure below.
Since its inception, the 'Eurekahedge ILS Advisers Index' has experienced an increasing acceptance by ILS investors, ILS funds, consultants and advisers, as a representative and fair benchmark for the asset class of insurance linked securities.
The year 2013 marked a new record for the asset class, as the total value of outstanding catastrophe (CAT) bonds passed US$20 billion for the first time. The asset class on insurance linked investing has been rapidly gaining traction among professional investors as an avenue of diversification due to its non-correlation to traditional and alternative asset classes and its stable and attractive performance - especially as an alternative to fixed income investments in the low interest rate environment.
The Eurekahedge ILS Advisers Index is an equally weighted index of hedge funds that explicitly allocate to insurance linked investments and have at least 70% of their portfolio invested in non-life risk. The new USD hedge version of the index is base weighted at 100 in December 2005 and has returned 7.18% per annum with a volatility of 2.30% until the end of 2013.
Insurance linked securities (ILS) also known as catastrophe or cat bonds are a transfer of insurance risk to the capital markets typically by insurance or reinsurance companies. The performance of ILS depends on the occurence respectively non-occurrence of an insured event. ILS show a low correlation with traditional asset classes and other alternative investment. ILS are typically not exposed to duration risk or interest rate risk since their return consists of a variable interest rate component plus an insurance premium for the risk assumed. Moreover they protect investors against inflation. Typically the ILS funds diversify their exposure across different perils such as natural catastrophe (wind, earthquake), man made risk and across different geographies US, Europe and Asia.