Harvard Physics Grad-Run Hedge Fund Rakes In 20% Returns In 2023, Riding High On Extreme Weather Bets

John Seo has found a unique way to profit from climate change and inflation. His hedge fund, Fermat Capital Management, is the world’s largest investor in catastrophe bonds, which are used by insurers to cover risks they cannot handle.

What Happened: Seo, 57, has been trading catastrophe bonds since their inception. His fund, Fermat, operates in a niche corner of the financial market and has quietly amassed a $10 billion portfolio, capturing a quarter of the market, reported Bloomberg.

Last year, the cat bond market saw a record $16 billion in issuances, bringing the market’s total size to $45 billion. This was largely due to insurers’ concerns about more destructive storms, wildfires, and floods, driven by climate change. As a result, buyers demanded higher interest rates, which Fermat was able to capitalize on.

Investing in cat bonds proved to be the most profitable hedge fund strategy of 2023. Fermat delivered a 20% return, outperforming the average 8% achieved by hedge funds as a whole.

Seo’s scientific background has been instrumental in developing a winning formula for trading cat bonds. His fund’s investment decisions are guided by complex weather-risk computer models powered by large servers, which continuously analyze market conditions.

"The insurance market is on edge," says Seo. "It's freaked out about risk and wants as little as possible."

Seo’s scientific knowledge has allowed Fermat to capitalize on the increasing frequency of multibillion-dollar natural disasters on a warmer planet. This has led to a surge in demand for cat bonds, with insurers charging more to protect customers from devastating weather.

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However, millions of people in poorer countries still lack a safety net if a climate tragedy occurs. The World Bank, which issues cat bonds to help developing nations, aims to increase its outstanding debt to $5 billion over the next five years from $1 billion today.

"You'll see us doing cat bonds beyond hurricanes, pandemics and earthquakes," says Michael Bennett, who heads a World Bank team that issues cat bonds and other derivatives. That could potentially include droughts and floods."We're very ambitious."

Why It Matters: Seo’s success with cat bonds comes at a time when the global financial market is grappling with the impact of climate change and inflation. The U.S. consumer price index exceeded expectations in February, rising to 3.2% compared to the previous year. This robust performance has cast doubt on the imminent commencement of interest rate cuts by the Federal Reserve.

Moreover, a looming threat of stagflation could prove detrimental to the U.S. stock market. JPMorgan has expressed concerns about a potential economic scenario reminiscent of the 1970s, characterized by low growth and high inflation, which could lead investors to prefer bonds over stocks.

These factors have led to predictions of a significant stock market crash and a year-long recession by market strategist Jon Wolfenbarger. Wolfenbarger, with over three decades of investing experience, relies on a variety of economic indicators that suggest an impending downturn, including the consistent decline of The Conference Board's Leading Economic Index and the longest stretch of an inverted yield curve in more than half a century.

Seo’s success with cat bonds is a testament to the resilience and adaptability of the financial market in the face of these challenges. His scientific approach to trading cat bonds has not only proven profitable but is also helping to provide financial protection against natural disasters for millions of people around the world.

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