A California firm announced today it has launched what might be described as weather derivatives for the little guy.

HedgeStreet, based In San Mateo, Calif., said it was selling hurricane contracts for as little as $9 that return $100 if the storm creates insured damage above certain levels that are certified by the Insurance Services Office, Inc. in Jersey City, N.J.

Russell Andersson, a co-founder of HedgeStreet, said the firm hopes to graduate to much bigger contract sizes, but in the meantime they would be "democratizing" the area of weather-risk investments with an entry level far lower than the catastrophe bonds in which reinsurers invest.

Small investors can go online at www.hedgestreet.com and open an account for as little as $100, Mr. Andersson explained.

HedgeStreet--which describes itself as the nation's first government-regulated online retail market for trading binary and futures contracts--already has products dealing with the oil and real estate markets.

It said traders can now "hedge or speculate on the economic impact of hurricane and tropical storm damage."

Mr. Andersson said traders are offered three options, paying out in the event of insured damage greater than $25 million, $100 million and $1 billion.

The HedgeStreet offerings for a weather event begin once a tropical storm has developed over the Atlantic Ocean, as determined by the National Hurricane Center.

Contract transactions on a named storm are open until the National Hurricane Center says it has departed.

"If it veers off, and the National Hurricane Center says the storm has passed, we close and settle the contract. If it makes landfall, you can trade after it hits, until two days before ISO comes out with its number," Mr. Andersson said.

He noted that it might be unlikely that there would be any contract offerings after a storm hit. His firm he explained holds funds on behalf of customers and when a contract is purchased HedgeStreet ensures that "the other person on the other side if the trade has enough money" to cover the transaction.

HedgeStreet said the last trading day for these contracts will coincide with the last day of the hurricane season--Nov. 30. Mr. Andersson said the company is hopeful that, in addition to members of the public, hedge funds and the insurance markets will participate in hurricane contracts.

Last night, hurricane contracts for Tropical Storm Debby, which originated off the west coast of Africa, were listed and made available for trading today at 9:00 a.m. EDT.

Chris Guidette, a spokesman for ISO--whose Property Claim Services unit provides the insured loss numbers HedgeStreet will use, said tropical storm derivatives are "another tool insurers can use to mitigate loss and are particularly important in this time of escalating loss exposure."

He said such contracts "can allow risk transfer of insurable losses within the insurance industry. If an insurance company writes in areas not hurricane-affected, it might assume some hurricane risk by buying instruments like this."

Mr. Guidette added that the hurricane contract market could help link reinsurers with traditional capital markets, as well as investors in the larger equities market.

"HedgeStreet is using ISO data to offer a low-cost means of hedging risk from hurricane and tropical storm damage. Our intention is to build this market into a valuable resource for mitigating storm damage risk," said Bill McIntosh, vice president of marketing for HedgeStreet.

Gary Kerney, assistant vice president of PCS, said that "ISO sees the development of tropical storm derivatives as another tool insurers can use to mitigate loss in an era of escalating catastrophe exposure."

Special Reports /

A New Derivative: Hurricane Contracts

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