Stone Ridge to launch ‘Interval’ ILS fund, to invest in illiquid assets

by Artemis on October 1, 2013

New York based insurance-linked securities and reinsurance-linked investment firm Stone Ridge Asset Management is launching a new ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund, as it seeks to offer investors access to more illiquid reinsurance-linked investments.

The investment manager, launched in 2012 by former Magnatar Capital hedge fund co-head of portfolio management Ross Stevens, already operates two reinsurance-linked investment funds with total investment assets reported at over $766 million at the end of April and a little lower at $708m at the end of July 2013.

Now Stone Ridge is seeking to launch the Stone Ridge Reinsurance Risk Premium Interval Fund, according to registration documents filed with the Securities and Exchange Commission (SEC). But this time the ILS and reinsurance-linked fund is a little different in that the structure of the fund is such that it will be able to invest in more illiquid investments, while still offering investors access to regular liquidity opportunities.

Liquidity is often discussed in the ILS and reinsurance-linked investing market. It refers to the ability to easily, and as quickly as practicable, move in and out of, or trade, certain investment positions.

Catastrophe bonds, as securities, offer liquidity to investors as they can be bought, sold and traded over secondary market ILS trading desks. Some investors have mandates stating that they must have access to regular liquidity opportunities; cat bonds are suitable for these investors seeking liquidity.

ILS funds typically invest in both liquid instruments, such as cat bonds, as well as illiquid instruments, such as private reinsurance contracts. ILS funds still offer their investors regular opportunities to exit an investment and redeem their capital, but these are not always as liquid as some investors require and there are often restrictions as to how frequently an exit opportunity may be offered.
Entering an ILS fund can also be a difficult proposition at times, when ILS fund managers are often forced to close down their funds to new capital due to a lack of available opportunities to deploy capital into.

Stone Ridge Asset Management offers its existing funds in the closed-end mutual fund format, making them available to certain investors via registered investment advisers and also with the ability to go direct to specific types of institutional investors. Its two existing funds, the Stone Ridge Reinsurance Risk Premium Fund and the Stone Ridge High Yield Reinsurance Risk Premium Fund are listed on an exchange.

The Stone Ridge Reinsurance Risk Premium Interval Fund however will be an unlisted closed-end fund, so with all the normal features of a mutual fund but no stock exchange listing.

An interval fund offers periodic share repurchases, for a portion of its share capital, to provide liquidity to its investors. The reason for this, we understand, is so that the new fund can invest in more illiquid investments, perhaps fully-collateralized reinsurance contracts, which Stone Ridge needs to ensure collateral is held for.

By offering an interval fund structure, investors will be able to access more illiquid reinsurance investments which can provide much higher levels of return. Investors will still be able to move out of the fund should they choose to, but on a schedule that Stone Ridge defines and investors will need to give notice if they wish to exit.

The prospectus says that the interval fund is more suited to investors with a long investment horizon, so those that do not mind having their capital locked up for longer periods of time. It will expect investors to open accounts with a minimum initial subscription size of $15m.

The repurchases will be held quarterly, investors will need to apply in advance, and can be for between 5% and 25% of the funds outstanding shares at net asset value. However Stone Ridge does not have to honour more than 5% of the repurchase requests, standard interval fund conditions, meaning that it can budget for its collateral needs correctly.

The prospectus for the Stone Ridge Reinsurance Risk Premium Interval Fund says that it will initially cap its assets at $500m, suggesting that Stone Ridge can raise up to half a billion in capital for this new fund if investor interest is sufficiently high. Given the success Stone Ridge has had raising capital for its other funds we’d expect this new offering to prove popular as well.

Launching this new interval ILS fund will give Stone Ridge more scope to offer its investors access to the higher returns of the more illiquid side of reinsurance-linked investments. Its two existing funds are predominantly focused on catastrophe bonds at the moment, as they have to offer a certain level of liquidity due to being exchange listed.

The documents filed with the SEC say that the fund is “Essentially a clone of Stone Ridge’s existing publicly offered mutual funds, but with greater exposure to illiquid securities.” The Stone Ridge Reinsurance Risk Premium Interval Fund will be able to invest in more collateralized reinsurance contracts and sidecars and this will appeal to different types of investors.

By broadening its offering in this way Stone Ridge should be able to tap into new types of investors and thus grow its total assets under management.

We will update you should we hear any more details about the launch of the Stone Ridge Reinsurance Risk Premium Interval Fund.

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