Investors can bet on storm contracts

Updated 8/24/2006 3:57 AM ET

By Adam Shell, USA TODAY

NEW YORK — Do you think the heretofore quiet 2006 hurricane season will turn Katrina-esque and cause billions of dollars in damage as weather experts predict?

Regardless of what your gut instinct is, you now have the ability to back up your hunch with a financial bet that could result in you either making — or losing — money depending on the scope of storm-related property losses.

On Thursday, HedgeStreet, a government-regulated online futures market, is launching hurricane contracts. The simple contracts allow investors to speculate on the economic fallout of hurricanes or tropical storms. They are the latest example of a growing Wall Street trend that gives investors a way to play short-term fluctuations in economic events or markets.

"We are interested in creating new risk-management vehicles[Gambling--RSB]," says HedgeStreet co-founder Russell Andersson. "There's a need for a hurricane-type product as evidenced by the events of last year."

The 2005 season shattered records. Hurricane Katrina alone caused an estimated $40 billion in insured property losses, according to Insurance Services Office (ISO). Meteorologists predict that 2006 will be another violent year and expect the storms to grow more deadly and costly for years.

HedgeStreet is offering two classes of so-called binary contracts, whose values are based on insurance-claims estimates provided by ISO. Each contract is valued at $100.

•Hurricane season. Hedges are based on whether insurance-claim estimates for the entire Atlantic hurricane season, which ends Nov. 30, will or will not exceed a certain amount. For example, one contract lets investors bet on whether full-season damages will top $25 billion.

While the contracts are simple yes/no bets, investors can buy and sell the contracts before the Nov. 30 strike date. Currently, there are contract values with damages above $100 million, above $1 billion, $10 billion and $25 billion.

•Named storms. Hedges can also be placed on preliminary damage assessments caused by an individual hurricane or tropical storm. HedgeStreet will issue its first such contract at 9 a.m. ET today for Tropical Storm Debby, which is churning out in the eastern Atlantic with winds of 45 mph.

This storm is weakening and is not expected to make landfall, which should make contracts relatively cheap when trading starts since it's less likely to cause a lot of damage. But there's always a chance that the price could spike if the storm suddenly morphs into a hurricane and barrels toward the USA.

Price Headley, chief analyst at BigTrends.com, says investors should use hurricane contracts only if, after assessing the probabilities the marketplace is placing on a certain damage estimate, they feel the market is mispricing the risk: "It should not just be a crap shoot."

One downside of the new contracts, at least at the beginning, is there is likely to be a dearth of liquidity and little trading volume

HedgeStreet offers contracts on a wide array of financial assets or instruments, ranging from commodities to currencies, housing prices interest rates and mortgage rates.

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