ESMA wants to remove $17.5B in catastrophe bonds from UCITS funds over complexity concerns

Asset managers across Europe and the U.S. are on alert after the European Securities and Markets Authority (ESMA) told the European Commission that catastrophe bonds, tied to extreme natural disasters, don’t belong in funds sold under the UCITS label.

The warning puts $17.5 billion worth of bonds at risk, all of it currently sitting inside funds meant to be safe enough for retail investors. The decision now sits with the Commission, and if they go along with it, fund managers could be forced into a fast and messy selloff.

The catastrophe bond market is worth around $56 billion, and about one-third of that is now wrapped up in UCITS products. Over the past year alone, about $5 billion more was added to these funds, according to Plenum Investments.

This is all happening during the U.S. hurricane season, which is when many of the most active cat bonds get triggered. The potential fallout is serious, especially for retail-heavy portfolios.

Neuberger and PGGM flag liquidity risks and exposure gaps

Peter DiFiore, managing director at Neuberger Berman in New York, warned that the idea that these bonds are untouchable during market turmoil is a dangerous myth. “We’ve not yet seen a big liquidity event,” Peter said. “The case for liquidity is much higher than it was before.”

His firm manages $1.3 billion in cat bonds, none of which are in UCITS products. But he’s watching closely. If retail-heavy funds are forced to unwind quickly, it could create what Peter called “buying opportunities in the secondary market.”

These bonds work like this: an insurance company wants to spread risk in case something like a hurricane wipes out a city. So they issue a catastrophe bond, and if nothing bad happens, the investors earn big. But if disaster hits, literally, investors can lose most or all of their money.

The math behind these bonds isn’t simple. You need to understand natural disasters, climate physics, and damage modeling to properly price them. That’s exactly why ESMA is saying: these don’t belong in products built for average investors.

Still, fund managers aren’t exactly aligned. PGGM, a Dutch pension fund that manages €250 billion, says none of its €2 billion cat bond portfolio is tied up in UCITS vehicles. Eveline Takken-Somers, who heads PGGM’s insurance-linked investments, said the good returns of recent years don’t show the full story.

“There have been losses prior to that and that’s maybe not visible then to everyone,” Eveline said. She warned that an earthquake in San Francisco could wipe out 30% to 40% of a portfolio in one shot. “If you’re not aware of that, you might regret it.”

Plenum says ESMA move cuts off retail access to strong performers

Daniel Grieger, chief investment officer at Plenum, says regulators are looking at the issue the wrong way. His firm runs $1.5 billion in cat bond UCITS funds. He argues that removing these bonds from UCITS products will block retail access to alternative assets that have delivered in rough markets.

“Cat bonds have generated strong returns in the past — during Covid, the rate shock, and Liberation Day,” Daniel said, referring to Trump’s tariffs, which shook global markets but didn’t dent cat bond returns.

Daniel said cutting off access goes against the EU’s own Savings and Investments Union (SIU) policy, which claims to support more financial choices for savers. “Everything needs to be looked at through the lens of the SIU,” he said.

His other point? These funds aren’t even being sold directly to random retail customers. Plenum’s clients are pension funds, hedge funds, and family offices. They all use professional asset managers, and those managers are the ones picking these bonds.

So even if retail money ends up in the fund, there’s a layer of experienced control there. Legal advisors aren’t ignoring the risk either. Ropes & Gray, a global law firm, warned that if the Commission agrees with ESMA, managers will need to prepare for a full shift in strategy. They’ll need to review what’s in their funds and possibly start pulling back fast.

Despite the regulatory mess, the market has kept climbing. The Swiss Re Global Cat Bond Performance Index is up about 7% in 2025, after growing nearly 50% since the end of 2021. For context, the S&P 500 grew about 40% over that same period, while the Bloomberg Global High Yield Total Return Index managed around 20%. Cat bonds have outperformed, but only if disaster stays away.

“Yes, investors can lose money in cat bonds,” Daniel said. “But they can also lose money in equities or high-yield bonds. The risk of loss is everywhere.”

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