Asset Pricing and Extreme Event Risk: Common Factors in ILS Fund Returns

Investment managers specializing in insurance-linked securities (ILS) generate returns that behave unlike those of any other asset class. We introduce four ILS-specific factor models, which explain their time-series and cross-sectional variation. Despite a strong fit, we are left with positive-significant alphas for about one quarter of the funds in our sample, some of which can be attributed to industry loss warranty (ILW) exposures. In addition, they are related to fund size, age, and performance fees. Although we do not find evidence for market timing abilities, we can rule out luck as a cause of outperformance by controlling for false discoveries.