Why Entropics is founded
I’ve met many investors through the years, asking for return that is truly independent of the financial markets. This was the background when I discussed the possibility to found the first Scandinavian cat bond management firm with Gunnar Roos in 2013.I’ve been working in the insurance and asset management businesses for almost 30 years. The past ten years, I’ve been working at Brummer & Partners, a Swedish asset manager and well-known for being the first hedge fund manager in Sweden. Part of my task was to found their insurance branch, Brummer Life and assume position as the first CEO of the firm. Before joining Brummer & Partners, I co-founded one of the first insurance brokerage firms in Sweden, where I also was CEO for ten years. I am dedicated to contribute to a well-functioning financial market and to meet with satisfied customers. Thus it was, as Brummer Life was up and running, a natural step to engage in a new entrepreneurial project.
The first time I learned about cat bonds was in the 1990:s, when the asset class was newly developed in the USA. Since, the market has grown globally and now amount to more than 20 billion USD. Still, many investors in Sweden have not heard about or understood the advantages of cat bonds.
I dare say that the structure of Swedish fund savings has not changed much in the past decades. By a rule of thumb, 65 % of saings are in stocks, 30 % in interest-bearing instruments and 5 % in hedge funds. Unfortunately, the stock market has been a disappointment in the past ten years, and the low interest rates provide little comfort. Even skilled managers have found it difficult to generate good risk adjusted returns. The situation is similar at the international level.
I have pondered about the state of the financial markets myself when considering my own investments. I have met many people asking exactly the same questions as I do; how do you find good returns at a controlled risk in a world characterized by uncertainty about international financial markets and public finances. My solution was to invest in index funds in combination with hedge funds. But I am not satisfied, but want greater risk diversification, better returns and lower overall risk in my portfolio.
Since 2002, Swiss Re Cat Bond Index has returned 8.5 % annually. Every year has had positive returns, in spite of the stock market drops in 2002, 2008 and 2011, and despite some of the largest natural catastrophes in the modern era, such as Katrina 2005, Ike 2008, Tohuko EQ 2011 and Sandy 2011. It was against this background that Entropics Asset Managment AB was formed.
Together with Gunnar Roos, I have composed a seven person team with backgrounds in insurance, responsible actuary, claims settlement of Cat claims, meteorology, asset management and communication. I dare say that we possess unique experience and competence to manage insurance risk and produce good returns at a controlled risk.
Cat bonds are not entirely unknown in Sweden. Institutional investors have already invested in cat bonds. One example is “3 AP-fonden” (the Third Public Pension Fund). The asset class has, however, been virtually unknown among smaller institutional and private investors. As we are set to make cat bonds more available to Swedish investors, this entails a responsibility to present cat bonds in a simple and transparent way, comprehensible to anyone. One example is the introduction video you can find at our web site.
This situation is not new to me, but something I have experience previously, for example by being given the mission to introduce hedge funds and index funds to private investors and for pension savings. Of course, I met several skeptical comments, meaning, among others, that hedge funds are exclusively for very wealthy private investors and institutions. Looking back, this mission in itself proved that new asset classes can be introduced in Sweden. Hedge funds are today a natural and obvious part of an investment portfolio.
I dare say that cat bond funds today are in a position similar to that off hedge funds fifteen years ago. The asset class is a true novelty to investors and those saving for pensions and increasing the expected return of a traditional portfolio, while the risk decreases.
Furthermore, investments in cat bonds assist in funding the reconstruction after large natural catastrophes. As investors own shares in a fund investing in a large number of cat bonds, they are compensated for the loss of one cat bond by the returns on many other bonds.
Based on 30 years of customer contacts in the insurance and asset management business, I am convinced that others will do as I do in a search for diversification and will find cat bonds a good investment opportunity. This is a good reason for us to start Entropics and hope to introduce our first fund investing in cat bonds in 2014.