Last year, hedge funds made a mint betting that hurricanes wouldn't make landfall on the Atlantic coast of the U.S. Now small investors have a shot.

Pioneer Investments recently launched a closed-end mutual fund, the ( HNW) Diversified High Income Trust (HNW), that can invest as much as 35% of assets in catastrophe bonds.

Catastrophe bonds, also known as "cat bonds" or insurance-linked securities, allow investors to bet on whether hurricanes and other natural disasters will strike and cause large insurance claims. They are typically issued by insurers or reinsurers who are looking for ways to offset some of their own exposure.

These investments carry big risks -- you can lose your entire investment, including the principal, if specific triggers are met and insurers are allowed to tap the money to pay damage claims. But they can also pay big returns. Interest rates on cat bonds soared after three major hurricanes battered the southeastern U.S. in 2005. But investors cashed in big time when the 2006 hurricane season turned out to be the mildest in years.

This year's hurricane season, which begins June 1, is expected to be much more severe: The National Hurricane Conference is calling for between seven and nine major hurricanes and 17 named storms. It says there is a 74% chance a major hurricane will hit the East Coast. So anyone buying cat bonds now is betting that forecasters will get it wrong again.

Pioneer isn't just using these securities to juice returns, however. The money manager says cat bonds can also provide diversification because their returns are not correlated with either equities or corporate bonds. Kenneth Taubes, Pioneer's director of U.S. fixed income, says the goal of the Diversified High Income Trust is "to achieve a higher yield than traditional high-yield funds with lower volatility."

In addition to cat bonds, the fund will also invest in floating-rate bank loans and high-yield corporate bonds. Initially, it will allocate 37.5% of assets each to junk bonds and floating-rate loans and 25% in cat bonds, but eventually the allocation to cat bonds will rise to a maximum of 35%.

Pioneer raised more than $180 million in the fund's initial public offering, in which the company issued 7.3 million shares at an initial price of $25 a share.

Like many closed-end funds, Diversified High Income Trust will also use leverage, or borrowed money, of up to 33% of the fund's assets to juice returns. That means total assets could reach $260 million.

Investors will have to pay up for the privilege of getting exposure to this exotic asset class. The Diversified High Income Trust carries an estimated annual expense ratio of 1.59%. Part of that reflects the cost of hiring a subadviser, Montpelier Re ( MRH), to manage the cat bond portion of the portfolio.

And investors who acquired the fund through its initial public offering also paid a sales load, or brokerage commission, of 4.5%. That's in addition to fees of 0.2% to cover the offering expenses.
Michael Katz joined in 2007. Michael has previously worked as a reporter at Forbes and an editor for two custom publishers, SmartMoney Custom Solutions and HNW Inc. He also worked in London as a freelance media reporter and correspondent for Broadcasting & Cable magazine. Michael has a B.A. in English from the University of Virginia.