From Fortune:

Hedge funds profited from catastrophes in 2023, with record gains due to bets on insurance-linked securities like catastrophe bonds. Cat bonds transfer disaster risk to investors in exchange for potential big returns if a catastrophe doesn’t occur. A surge in cat bond issuance and increased reconstruction costs fueled the market’s record performance. Some funds saw returns of over 18%.

Cat bond interest surged as a result of extreme weather events and inflation, leading to a record $16.4 billion in issuance in 2023. Spreads, or premiums over the risk-free rate, were the highest in the industry’s history. The benign US hurricane season further amplified returns and increased hedge fund interest in insurance-linked securities.

The impact of global warming on weather patterns is a key feature of cat bond modeling, with an increasing market interest in secondary perils like severe storms and wildfires. The market is also expanding to include new kinds of risk, such as cyber-catastrophe bonds. Global cat bond capacity has grown at about 4% annually for the past six years and reached around $100 billion by the end of 2023.

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Read more: Hedge funds win big betting on disaster, climate change, wildfires as catastrophe bond market hits $45 billion