Stone Ridge boosts interval ILS fund NAV with reverse share split

Stone Ridge Asset Management, the New York based asset manager with a focus on alternative risk premia strategies including reinsurance and insurance-linked securities (ILS), has actioned a reverse share split on its interval ILS fund strategy, effectively boosting the net asset value (NAV) of the strategy.

Stone Ridge filed to undertake the share split back in July and the manager actioned the 1-for-5 reverse share split across the outstanding shares of its Stone Ridge Reinsurance Risk Premium Interval Fund at the close of business on Friday.

As of yesterday, August the 3rd, the net asset value (NAV) of the investment manager’s Stone Ridge Reinsurance Risk Premium Interval Fund had risen by roughly five times where it sat on Friday at $7.99 per share, to reach what is now a new high of $39.97 per share.

Each shareholder in the mutual interval strategy ILS and reinsurance fund at the end of Friday’s business day will have seen their holdings subject to the reverse share split.

This means that every five outstanding shares in the Stone Ridge Reinsurance Risk Premium Interval Fund held will have been converted into one share, or a fraction of a share.

Hence the reverse share split reduces the amount of shares available in the Fund by a factor of five, but the NAV of each new share will have risen by a proportional amount.

Hence the NAV for the Stone Ridge Reinsurance Risk Premium Interval Fund having risen to $39.97 as of the end of play yesterday.

As a result, the number of shares available in the fund are effectively consolidated, while their value has increased.

The reasoning behind the move is difficult to be sure of, but it could be related to the high-levels of investor redemptions that Stone Ridge has suffered to this ILS fund strategy, after the consecutive years of catastrophe losses that hit its reinsurance funds.

By boosting the value of its shares and reducing their number, it may transpire that holders in the interval ILS fund reduce in number over time and perhaps become more institutional in nature, given the higher cost of the shares.

There is also a chance that Stone Ridge wanted to ward off any chance that the value of shares in the Reinsurance Risk Premium Interval Fund declined much further should it experience additional high-levels of redemptions to service.

Reverse share splits can bring on more selling pressure, but as an Interval fund it is possible for this to be controlled through the percentages of outstanding shares allowed to be redeemed at any one time.

Share price can be a determinant in the investors you can source for a strategy, as some institutional investors in particular will not take a position in a share whose value is below a certain level.

Other potential reasons for reverse share splits are regulatory in nature, or related to the potential sale of a business, which seems unlikely in this case.

Overall, it seems perhaps most likely that the higher priced shares, with fewer in circulation, might make it easier to continue managing redemptions, but also make the fund potentially more attractive to larger investors at the same time.

There is also a consideration for the costs of share transactions as well, as for the end-investors, dealing in fewer, higher-valued shares in the Stone Ridge ILS fund may make it a more efficient place to deploy their capital.

We can’t be 100% certain though, as no information on the motives behind this move are available at this time.