New York based Stone Ridge Asset Management, a provider of mutual fund investments across a variety of alternative risk assets including reinsurance and insurance-linked securities (ILS), is launching a new fund which will allow reinsurance as one of the underlying asset classes.
The Stone Ridge All Asset Variance Risk Premium Fund is a mutual fund with an interval structure, allowing the manager better control of liquidity and redemptions. It’s classified as a non-diversified fund, meaning that while still having an element of diversification through asset class allocations, it is designed to be held as part of a diversified portfolio, rather than being fully diversified itself.
The new fund will focus on “Variance risk premium”, which Stone Ridge defines as; “The tendency for “implied volatility” – the expected level of volatility priced into different types of investments – to be higher, on average, than the volatility actually experienced on the asset underlying the investment.”
The All Asset Variance Risk Premium Fund will primarily invest in assets classed as equity and debt securities, foreign exchange, interest rates, commodities, real estate interests, volatility, and other asset classes that Stone Ridge may consider appropriate from time to time. The fund can also enter into contracts that provide risk transfer, which with a derivatives and also volatility element could get interesting we’d imagine.
One of the additional asset classes that the new fund from Stone Ridge can invest in is, no surprise, “reinsurance related securities”. Given the strong growth of Stone Ridge’s reinsurance, catastrophe bonds and other insurance-linked securities (ILS) mutual funds, which now have over $2.124 billion of assets at the last count, it’s no surprise to see the fund adding reinsurance as an option for this new fund.
How much the manager would use the ability to allocate to reinsurance within this fund, which does not need to be broadly diversified and intends to primarily target other asset classes, remains to be seen. However it does leave the option open and we could see Stone Ridge increasing its reinsurance and ILS allocations as a result.
The registration documentation for the new Stone Ridge All Asset Variance Risk Premium Fund features a maximum offering of $1.5 billion, at $10 per share, however the documents also suggest that Stone Ridge may cap the fund at $1 billion at launch at which time it will be closed to other investors.
Whether this fund will feature reinsurance heavily or not remains to be seen, but it is another example of Stone Ridge’s strategy of bringing risk asset investments to mutual fund investors through 40’s Act structures.
The manager has had huge success raising capital for its existing reinsurance and ILS funds as well as its range of Variance Risk Premium funds. Six of the managers Variance funds had close to $1 billion of assets within them at the 31st October 2014.
Another Variance fund has since appeared, bringing the range to seven. None of the existing Variance funds allocate to reinsurance at this time. This new fund launch will take that to eight and could increase the assets managed considerably.
It’s worth also noting that it’s actually not that surprising to see reinsurance and ILS mentioned as an asset class that a mutual fund can allocate to. The amount of multi-asset class funds that mention ILS as a possible allocation type is growing steadily and many mutual fund managers add it to their documentation. It doesn’t always mean they will allocate to reinsurance or ILS though, it’s simply another sign of the growing acceptance of the insurance linked asset class.
In Stone Ridge’s case, given the success it’s already having with reinsurance and ILS, the chances of this fund allocating to the space is likely much higher.
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