Insurance-linked strategies, which essentially reverse the role between investors and insurers, could be an option for those seeking diversification into asset classes less correlated to financial markets, according to Credit Suisse.
Insurers or reinsurers pay investors, such as Credit Suisse's actively-managed Insurance Related Investment Solution (IRIS) portfolios, an upfront premium but receive cover if catastrophic events or "perils" meeting set criteria occur.
For example, the IRIS fund may take a position where it is required to pay a set amount of cover if a magnitude 7.6 earthquake or stronger occurs in California.
Upon taking the position, the insurance firm would have to pay a $500,000 premium to the fund, providing investors with immediate gains.
"The premium is invested in very low risk money market securities and then a letter of credit is provided from Credit Suisse to the insurer or reinsurer that says 'if this event occurs, you will get $5 million'," Credit Suisse Australia vice president of alternative investments Kate Wilkie said.
An upfront premium is critical as it means there is no counterparty credit risk to the fund.
"The fundamental premise of a strategy like this is that an earthquake in Japan is uncorrelated to a hurricane in the US," Wilkie said.
"Also, by capping the individual amounts of cover that you may be required to pay, you can construct a portfolio that has quite a low level of volatility."
Investments are also split by instruments and include securitised catastrophe bonds and swap positions.
Credit Suisse's IRIS Low Volatility fund returned 6.2 per cent a year from its 2001 inception until the end of 2007.
