Blackstone selects Nephila Capital as a sub-advisor for new mutual fund

Insurance-linked securities and reinsurance-linked investment manager Nephila Capital, the largest asset manager in the space with just over $7.89 billion of insurance-linked assets under management at the firm, has been selected as one of the sub-advisors for a new mutual multi-manager fund offering from Blackstone Alternative Asset Management.

Blackstone Alternative Asset Management, the hedge fund solutions group of Blackstone, is launching its first alternative investments focused mutual fund which offers daily liquidity to investors. BAAM has $49 billion under management and has developed this new mutual fund offering by partnering with some of the best managers in the alternative asset class space.

As a multi-manager fund, which will allocate its capital to an unspecified number of sub-advisors, this fund will provide a diversified return across the alternative investment space. It’s akin to a fund-of-funds strategy, allowing investors to gain alpha from a diversified portfolio of asset classes, all with low-correlation to the wider financial markets and equities.

J. Tomilson Hill, Vice-Chairman of Blackstone and CEO of BAAM, commented; “We are delighted to enter this market and to offer a daily liquid product that provides portfolio diversification through alternative strategies that are designed to be uncorrelated with those of traditional asset classes.”

The new offering is called The Blackstone Alternative Multi-Manager Fund. It will operate as a registered, open-end mutual fund managed by Blackstone Alternative Investment Advisors LLC. The investment objective is to allocate assets with a number of investment sub-advisers who all have experience managing non-traditional or alternative asset class strategies. Blackstone may itself manage a portion of the Fund’s assets directly and may also invest in other, unaffiliated hedge funds.

Nephila Capital has been selected as one of the asset managers which will manage a portion of the funds from the Blackstone Alternative Multi-Manager Fund. It’s encouraging that Nephila has been selected as it again demonstrates the rising profile of the reinsurance-linked investment and ILS asset class as a key component of any alternative investment strategy.

For Nephila Capital, the sub-advisory work with Blackstone will bring them another source of investment capital inflow, this time also from retail and high net-worth investors who may allocate to the new Blackstone fund offering. This will further diversify the sources of capital that Nephila is bringing into the ILS space and help the firm grow its assets under management even further.

Blackstone has really analysed the sub-advisors and it’s testament to Nephila’s continued growth and success that it has been included. As a multi-manager fund Blackstone will have selected the asset classes that it feels are the best performers, and most stable, in the alternative investments space. The fact that ILS and reinsurance have been included in this fund will further help to promote the sector and the investment return profile of the ILS space.

John McCormick, Senior Managing Director and Head of Global Business Strategy for BAAM commented on the thinking behind this new fund strategy; “Blackstone has spent the last three years analyzing and preparing to enter the market for liquid alternatives. Our research led us to believe that there are a few critical success factors that will separate the winners from the losers. First, you have to provide access to leading investment talent. Our industry position and relationships allow us to offer access to a group of the highest-conviction hedge fund managers on BAAM’s roster — managers currently representing a significant amount of BAAM’s capital on a dollar and percentage basis. Our track record of structuring value-added transactions has enabled us to secure this capacity. Second, significant investments in technology and infrastructure are necessary in order to operate effectively in a daily environment, subject to 1940 Act rules. Finally, you have to ensure that your manager due diligence and investment processes are consistent with those that have proven successful over time, and that the underlying strategies lend themselves to a successful transition to a daily, more highly-regulated environment.”

Stephen Sullens, Senior Managing Director and Head of Portfolio Management for BAAM, added; “We approached the portfolio construction process by leveraging our extensive experience constructing custom solutions for sophisticated institutional investors. We are confident that we have identified hedge fund strategies and manager skill sets that translate well into a multi-manager solution in a 1940 Act framework. Investors in this product will benefit from the full breadth of Blackstone’s manager due diligence and screening procedures, top down asset allocation views and ongoing portfolio management capabilities.”

This is the first time Blackstone has opened a mutual fund allowing retail investor capital into its business. As a private equity outfit, Blackstone is similar to KKR who bought 25% of Nephila Capital earlier this year. It’s interesting that both of these large PE asset managers and investors have clearly seen the attraction of reinsurance-linked investments and it’s further evidence of the growing profile of ILS.

It’s also interesting that Blackstone has chosen alternative assets as its first play to attract capital from individual, or retail, investors. We expect to see many more alternative investment strategies launching to target individual investors in the months and years to come, as retail investors seek access to hedge fund returns, and ILS and reinsurance stand a very good chance to participate in many of these.

The funds prospectus specifically mentions event-linked bonds and catastrophe bonds as assets which the Blackstone fund will invest in, likely referring to Nephila. We’d also imagine that the fund will gain valuable exposure to private reinsurance contracts for the portion that Nephila manages.

This fund offering from Blackstone is another example of an investment opportunity open to retail investors, with no minimum investment requirement, which will allow them to access the return of the catastrophe reinsurance space. As these opportunities grow it will bring new, diverse sources of capital into the ILS space and result in further launches of similar alternative strategies which target reinsurance as one underlying asset class.

Read our article from yesterday on Nephila Capital: 76% of ILS assets at Nephila Capital come from pension funds.