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A hedge fund run by a Harvard physics grad delivered 20% returns in 2023 betting on extreme weather


Hurricane Irma

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  • John Seo steered Fermat Capital Management to 20% gains in 2023, Bloomberg reported.

  • A Harvard physics grad, Seo traded catastrophe bonds with great success amid volatile weather and inflation.

  • Seo has been trading cat bonds for decades, and last year insurers issued a record $16 billion of them.

In 2023, John Seo comfortably beat the market placing bets on the weather.

Seo — who holds a PhD in biophysics from Harvard University — runs Fermat Capital Management, and delivered 20% returns last year. That’s more than double the hedge fund average of 8% in that stretch.

According to a Bloomberg profile published Tuesday, Seo’s firm owns the largest collection of catastrophe bonds in the world. Insurers issue the debt securities to account for unanticipated risks and super-rare events.

Cat bonds, which pay investors as long as disaster does not strike, have become a lucrative, high-yielding bet in the age of rising climate catastrophes. The bonds help insurers meet obligations to policyholders in the event of a natural disaster. They have been around for decades, and Seo has been trading them for about as long, the report said.

He makes investment decisions with computer weather models, and last year was a banner year for the complex assets. Insurers issued a record $16 billion worth of cat bonds amid concerns about extreme weather as well as inflation pressures, which have made it more expensive to rebuild after a natural disaster.

Companies are concerned about the growing occurrence of climate-related tragedy or damages, and the Bloomberg report said less than a third of the $380 billion in global climate losses was insured.

“The insurance market is on edge,” Seo told Bloomberg. “It’s freaked out about risk and wants as little as possible.”

Fermat, which Seo founded in 2001 with his brother, holds a roughly $10.8 billion portfolio and was able to capture about a quarter of the cat bond market in 2023. It holds stakes in about 80% of the nearly 300 securities outstanding in the market.

These assets are issued only once in awhile to protect against major, freak incidents like particularly damaging hurricanes or earthquakes. They’re also a method used by by large multinational finance organizations like the World Bank to help pay for rebuilding in developing countries after a disaster strikes.

That rarity, however, creates a market of potentially drastic wins and losses — and Fermat nailed its trades for its best year of returns ever.

Last year was “a unicorn year where you have great returns and equilibrium in the market,” Fermat managing director Brett Houghton told Bloomberg in a separate January interview. One factor that helped cat bond investors was that the hurricane season was less severe than in 2022, which meant fewer losses had to be covered.

“2024 promises to be another interesting year for investors in terms of attractive returns,” Houghton said, per Bloomberg.

Read the original article on Business Insider



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