ILS fund
A collective vehicle investing in cat bonds and collateralized reinsurance on behalf of institutional investors.
In 2018, the US insurer Markel bought Nephila Capital, one of the largest insurance-linked securities managers: running ILS funds had become a big enough business for a listed insurer to want to own one. An ILS fund takes money from pension funds, sovereign funds and asset managers and puts it into cat bonds, collateralized reinsurance shares, industry loss warranties and sidecars. The manager sells a skill the investor does not have: reading a Japanese retrocession layer, modeling it, following its claims. The sales pitch is low correlation, since an earthquake has no reason to coincide with an equity selloff. That holds against financial markets, less so on liquidity. Redemptions are often quarterly, positions hit by an event move into a side pocket, and collateral can stay trapped for years. The risk itself is bunched into a few months depending on the perils carried: summer and fall for North Atlantic hurricane.
In 2026, a Nordic pension fund allocates 1.5 percent of its assets, or 420 million euros, across three specialist funds. The stated target return is 7 to 9 percent, with historical correlation to equities below 0.1. The documentation provides for quarterly redemptions, suspended on side pockets, and lock-ups of up to thirty-six months on affected positions.
ILS fund, cat bond fund, catastrophe fund
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