Aeolus gains £51m investment from London Pensions Fund Authority

UK local authority pension fund manager the London Pensions Fund Authority (LPFA) made an investment of around £51 million in two of the reinsurance linked investment funds managed by Bermuda-based specialist Aeolus Capital Management Ltd.

The investment was made in the calendar year ending March 31st 2017, according to the latest information from the £5.3 billion London Pensions Fund Authority.

UK pension funds are increasingly becoming comfortable with the ILS and reinsurance linked asset class, with a growing number of authority and private pensions investing in ILS as they look for alternative sources of return which exhibit low levels of financial market correlation.

The investment is split across two ILS funds managed by Aeolus, the ILS manager that is now controlled by multi-strategy hedge fund manager Elliott Management Corporation after the firm acquired a controlling stake.

As at March 31st 2017 the LPFA had almost £20.5 million allocated to the Aeolus Property Catastrophe Keystone Fund LP, which is a higher-yielding ILS fund strategy that underwrites property catastrophe reinsurance and retrocession, and almost £30.7 million to the Aeolus Property Catastrophe Spire Fund LP, which underwrites a lower-risk, more remote portfolio of property catastrophe reinsurance and retro.

Aeolus, which had around $3.2 billion of ILS assets under management at the middle of this year is known for its specialism in writing complex property catastrophe reinsurance and retro, with its funds proving popular with a wide-range of investors.

For a large pension fund such as the London Pensions Fund Authority, making a first allocation to ILS can take time and its likely that the LPFA had been analysis the ILS asset class for some years prior to selecting Aeolus and making this allocation.

The LPFA explains how it undertakes this process, saying that first a new asset class is judged for its suitability, after which they must be well understood by the pension fund’s board, consistent with its risk and return targets, and make a significant contribution to the fund’s return and risk characteristics.

In addition, for any new asset class to be considered it has to be “less than perfectly correlated with equities and bonds, so that the portfolio benefits from increased diversification,” something which ILS, of course, exhibits in abundance.

Large pension funds continue to discover, spend the time learning about, gain an appreciation for, and finally allocate to ILS. As more pension funds of this type go through this process we can expect ongoing growth from the asset class.