Fermat Capital captures a structural return from the catastrophe market through a long only portfolio that seeks to offer the maximum risk-adjusted return for an appropriate level of diversification. The aim of Fermat's strategy is to ensure that investors are adequately compensated for accepting the appropriate amount of identifiable risk while avoiding uncompensated risk.
Fermat's investment process has three key steps: (1) Security due diligence, (2) Security pricing and selection, and (3) Portfolio construction. These three processes are cycled continuously on a weekly, sometimes daily, basis. This enables Fermat Capital to react to investment opportunities, particularly in the traded secondary market of catastrophe bonds. Market conditions change from wind seasonality effects, changes in risk data and underlying risk exposure, changes in catastrophe models, contract timing, accumulating insurance losses, and changes in market composition.
A central component of our investment process is a proprietary CATastrophe asset price Model (CATM), which is a form of the CAPM model adapted for use in continuous-time trading and portfolio optimization of ILS. CATM breaks completely free of the confines of the bell-curve distribution for modelling security returns and classic correlation measures for estimating the downside risk of portfolios. CATM achieves this with proprietary mathematical and computational frameworks. Knowledgeable use of CATM has allowed Fermat Capital to be a major presence in the traded secondary markets in catastrophe bonds ever since its founding in 2001.