Investors: Catastrophe Reinsurance Hedge Fund Nephila Hit By Japan Quake

Mar 25 2011 | 12:39pm ET

The problem with the catastrophe reinsurance business is that catastrophes do sometimes happen, as hedge fund Nephila Capital is learning.

The $2 billion cat-risk specialist has seen two catastrophes over the last two months—the earthquakes in New Zealand and Japan—and is likely to feel the pain from the latter, which caused a devastating tsunami and nuclear crisis and took an estimated 20,000 lives, Dow Jones Newswires reports, citing two investors.

Nephila, founded in 1997, lost 1.5% in February, in part due to the New Zealand quake that devastated the city of Christchurch. It will likely suffer even bigger losses this month due to the Japanese tragedy, although how much bigger will not be clear until the end of March. According to one cat-bond index, the asset class suffered one of its biggest-ever declines in the week after the Japanese quake.

Nephila, which has returned an annualized 6% from inception through last April, had a 59% exposure to cat-bonds as of then.

Many hedge funds that jumped into cat-risk over the past decade have pulled out since the financial crisis. Nephila itself required a capital infusion from the Man Group, which now owns a quarter of the firm, to get through the period.

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