Stone Ridge to consolidate two of its ILS mutual funds

by Artemis on August 30, 2016

U.S. mutual fund and insurance-linked securities (ILS) investment manager Stone Ridge Asset Management is seeking to consolidate two of its insurance and reinsurance linked mutual funds into the same strategy.

Stone Ridge Asset Management is perhaps the fastest growing ILS fund manager of recent years, hitting $4.76 billion of ILS and reinsurance linked assets under management at the end of April 2016, across its range of three ILS mutual fund strategies.

When Stone Ridge launched its push into the ILS and reinsurance linked investments space, as part of its strategy as a beta and alternative risk focused mutual fund manager, the manager began with two funds in 2013, the Stone Ridge Reinsurance Risk Premium Fund and Stone Ridge High Yield Reinsurance Risk Premium Fund.

Stone Ridge later launched the Stone Ridge Reinsurance Risk Premium Interval Fund in 2014, which has since its launch been the driver of much of the asset growth as this strategy grew far more rapidly than the two funds the manager launched with.

By the end of April 2016 the Stone Ridge Reinsurance Risk Premium Fund had grown to $1.13 billion, and the Stone Ridge High Yield Reinsurance Risk Premium Fund hit $494 million, while the faster growing Stone Ridge Reinsurance Risk Premium Interval Fund had reached $3.14 billion of ILS and reinsurance linked assets.

Stone Ridge now wants to consolidate the initial two funds, the Reinsurance Risk Premium Fund and the High Yield Reinsurance Risk Premium Fund, into a single strategy, perhaps as a way to simplify its offering to investors or as an acknowledgement that with returns now lower in ILS and reinsurance the yields possible in  the market do not warrant two separate strategies.

We would imagine simplification has a lot to do with this, as well as maximising investment opportunities by merging the two funds investment strategies which were similar anyway.

Stone Ridge notes in a filing on the proposal for the reorganisation of these two funds that they have “identical investment objectives and substantially similar investment strategies.”

In fact the only difference in investment strategies is that the High Yield fund has the ability to invest in junk status debt securities. Both funds invest across a range of ILS assets, including catastrophe bonds, quota share arrangements, reinsurance sidecar notes, industry loss warranties (ILW’s) and other private ILS transactions.

The High Yield fund has a higher target return, but with the assets invested in being comparable and ILS market returns having declined these funds are really very similar, in terms of portfolios and returns anyway so the consolidation makes a lot of sense from an ease of management point of view, as well as for explaining strategies to potential investors.

In fact, when looking at returns the Stone Ridge Reinsurance Risk Premium Fund returned just over 2% in the first four months of 2016, while the Stone Ridge High Yield Reinsurance Risk Premium Fund returned around 2.3%, so very similar.

With such similar investment strategies, portfolios of assets and return profiles, the merging of these two ILS funds makes a lot of sense and will simplify Stone Ridge’s offering to investors.

Stone Ridge now has to seek approval from the Board of Trustees of Stone Ridge Trust for the proposed plan of reorganisation. If approved the reorganisation of the two funds into a single ILS mutual fund strategy is expected to happen around December 5th.

Also read:

Stone Ridge ILS & reinsurance assets hit $4.76bn, growth slows slightly to 7%.

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