Rational Funds begins marketing new mutual ILS fund strategy

Rational Funds, a provider of mutual fund products that focuses on delivering superior risk-adjusted returns through a systematic investment process, often with an alternative focus, is launching its first insurance-linked securities (ILS) fund strategy.

The Rational Insurance Linked Income Fund is set to be offered to investors as a non-diversified mutual fund registered under the 1940 Act and will invest in ILS and other assets across the insurance and reinsurance linked spectrum it appears.

The funds prospectus states that it will seek to allocate the capital it raises to, “event-linked bonds, event-linked swaps, as well as corporate debt and preferred stock issued by insurance or reinsurance companies; and exchange-traded funds that primarily invest in the preceding (collectively, “insurance-related investments”).”

It’s expected that a reasonable amount of the investments will be in catastrophe bonds and other event-linked securities issued by insurance and reinsurance firms, while swaps will also provide Rational Funds with another way to access insurance-linked returns.

The majority of the funds assets are expected to be invested in insurance-related securities tied to both natural and man-made disasters, the prospectus states, suggesting that the investments may well go beyond what is normally termed as an event-linked bond or swap into collateralized reinsurance and perhaps, like other mutual ILS funds, into the realm of private quota shares and other private ILS transactions.

Rational Advisors, the advisory arm of the mutual fund manager, will act as investment advisor for the Rational Insurance Linked Income Fund, but an as yet unnamed sub-advisor will provide the actual portfolio management expertise for the new ILS strategy.

Rational Funds tends to work with established specialist fund management groups for its mutual funds, suggesting that it could be a known ILS fund manager that emerges as the entity taking on the sub-advisory and portfolio management role for this new launch.

However, it’s said the sub-advisor does not have any experience managing mutual funds, which rules out other sub-advisors to mutual ILS funds. It also says the sub-advisor was founded in 2018 and is a registered investment advisor. This suggests that it may not be an ILS manager who to-date has partnered with a mutual fund manager in this way and also perhaps isn’t one of the usual ILS fund manager suspects, maybe being a new launch as well. This will likely become clear as updated prospectus’ get filed over the coming months.

It appears that Rational Funds is targeting a December 2018 launch for the mutual ILS fund strategy, suggesting that the investment manager is aware of the importance of having capital and being ready to participate in the market at January and through the first-quarter, when issuance of new ILS and cat bonds tends to be high.

Retail and institutional share classes are being offered, with the mutual ILS fund set to be distributed in the usual way, through RIA’s etc.

It will be interesting to see how much traction and in turn assets the Rational Insurance Linked Income Fund garners from investors, also whether its mandate is as broad as we suspect, in terms of the reinsurance assets it allocates capital to.

It will also be interesting to see who turns up as the portfolio managers and sub-advisor to the fund, whether they are recognised ILS market participants or perhaps a new start-up.