Aeolus wins $110m mandate from Arkansas Teacher pension fund

The Arkansas Teacher Retirement System, a state pension fund established to provide retirement solutions to Arkansas education professionals, has made a $75m allocation to a reinsurance-linked ILS fund managed by Aeolus Capital Management.

The Arkansas Teacher Retirement System has suffered from recent financial market volatility, according to a report from its investment consultant, particularly in its equity allocations, resulting in a desire to become better diversified.

An allocation to an insurance-linked securities (ILS) fund, such as those operated by Aeolus, will satisfy that desire while also providing a source of return that is largely uncorrelated with other asset classes. As part of the diversification drive the pension fund announced the allocation in board documents recently.

The initial allocation of $75m is said to be just a first deployment into Aeolus’ ILS fund by the pension, with the mandate allowing for up to $110m to be allocated to the Aeolus Property Catastrophe Keystone PF Fund, L.P., one of the ILS managers’ flagship fund offerings.

In July and August the value of the pension fund’s investments in equities dropped from $8.94 billion on June 30th to $8.40 billion on August 31st, a -5.8% return. Over the same period the pension fund’s bond investments remained static.

Given the seasonal returns earned by ILS funds in the last few months, had the pension fund made its allocation to Aeolus prior to the stock decline the largely uncorrelated returns and seasonal premium allocation would have been helpful.

The allocation to Aeolus comes as part of a $300m range of mandates all aiming to diversify the Arkansas Teacher pension fund’s sources of investment return.

While the pension fund says it recognises the risk of losing capital in an investment exposed to insurance related catastrophe risks, it expects to benefit as it also recognises that those losses are unlikely to occur at the same time as financial market volatility.