Catastrophe bonds are typically floating rate and issued by insurers to transfer risk in the event of a major catastrophe occurring. They agree to pay investors an annual interest premium, whilst investors agree to forsake the bond’s principal, should a trigger mechanism (i.e. a hurricane) occur. The above-benchmark returns make it an attractive diversifier for Japanese pensions keen to branch away from low-yielding JGBs. An AIFAM spokesperson told Hedgeweek: “The idea is to diversify at multiple levels including geographies, perils and bond structures. The US, Europe and Japan are the main geographic focus due to the universe (of cat bonds), but we incorporate other regions as much as possible, such as Mexico and Australia.” The fund currently invests in 30 to 40 cat bonds with hurricanes and earthquakes the two main perils. To date the fund has had no additional leverage. Regarding Japanese pensions, the spokesperson added: “Cat bonds bring to them fixed income-like carry-based returns while bringing the portfolio diversifying characteristics of an alternative asset class.”