Stone Ridge mutual ILS funds shrink 18% to $4.1bn on redemptions

Stone Ridge Asset Management’s mutual insurance-linked securities (ILS) fund assets shrank by a further 18% in the last quarter of record, as high levels of redemptions continued and over a billion dollars exited its interval ILS fund strategy.

Again, it is the higher-risk, less liquid interval style mutual ILS fund that saw the biggest outflows, with investors redeeming over a billion dollars in the quarter to April 30th 2020 and this fund shrank by 24% as a result.

Overall, Stone Ridge’s mutual ILS fund assets under management declined by 18% in the quarter to April 30th 2020, with some evidence of continued creep in catastrophe losses showing in the valuations of certain ILS and reinsurance assets, but the main driver of the decline appears to be investor redemptions.

Stone Ridge’s two mutual ILS funds, the more catastrophe bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX) and the less liquid and more collateralised reinsurance and quota share focused Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), ended April with total net assets of just under $4.1 billion across the pair.

That’s down around 18% from the $5.13 billion of assets under management reported across the two mutual ILS and reinsurance linked funds at the end of January 2020.

Assets in the two Stone Ridge mutual ILS funds had been shrinking steadily since reaching a high of almost $7 billion at the middle of 2018, as catastrophe loss payments and investor redemptions reduced the assets held.

It’s clear from the latest half-yearly reports released by alternative asset manager Stone Ridge that redemptions accelerated in 2020.

Stone Ridge had increased the amount of its interval fund that was available for redemption earlier this year, with one of the repurchase intervals offering to repurchase as much as 22.5% of the funds shares should investors want to exit.

It seems investors took that opportunity to recognise liquidity in their investments, hence the offering of a much larger repurchase opportunity was likely proactively made by Stone Ridge in order to satisfy investors wanting to leave the strategy.

Typically these repurchase opportunities for the interval ILS funds are much smaller and Stone Ridge’s more recent offer was back to 5% of the aggregate of the funds shares, suggesting much lower redemption demand from its investors.

So investors clearly took their opportunity to redeem and that has left Stone Ridge’s mutual ILS funds much smaller, although still meaningful at over $4 billion between the two.

Stone Ridge’s more catastrophe bond focused mutual fund strategy, the Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), shrank by 6% in the quarter ending April 30th 2020, falling to $899 million of assets.

It’s perhaps a little surprising this fund shrank, given how buoyant the catastrophe bond market has been. But again, it seems this is down to redemptions, with almost $207 million of shares redeemed in the six months to April 30th 2020.

Fresh shares sold into this strategy and dividends reinvested in the period actually outpaced redemptions at around $224 million, but other accounting and operational costs including deprecation on certain invested ILS assets (largely due to the mark-downs of cat bonds because of the Covid-19 pandemic it seems) meant the overall fund AuM shrank in the period.

It should be seen as positive for investors though that Stone Ridge has continued to allocate to new catastrophe bond deals up to April this year, with a number of new positions added in the last quarter of record.

It’s also worth noting that any mark-to-market decline in cat bond values as a result of the pandemic will have been mostly recovered by this time, so it will be interesting to see how this fund looks at the next reporting of its net assets.

Stone Ridge’s higher-risk and return mutual ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), which is more focused on collateralised reinsurance quota shares, less liquid ILS assets and other private ILS deals, shrank much more considerably, due to the much wider redemption gate offered to investors earlier this year.

The Stone Ridge ILS Interval Fund ended April 2020 with its total net assets down around 24%, declining to just under $3.2 billion, down from $4.17 billion at the end of January.

In the half-year to April 20th 2020, Stone Ridge reports that the cost of shares redeemed by investors in the Reinsurance Risk Premium Interval Fund was a huge almost $1.36 billion.

During the same period only $95 million of new shares were sold and $33.6 million purchased by investors reinvesting their dividends in the fund.

So the steep decline in assets is almost entirely driven by the large amount of redemptions seen, as well as some decline in the value of catastrophe bonds and a few other ILS or reinsurance investments, but with redemptions being the main driver by a significant amount.

Returns for both of Stone Ridge’s ILS and reinsurance mutual funds are still depressed by the hangover of significant losses from prior year catastrophe events, but now also by the mark-to-market declines seen as a result of the Covid-19 pandemic.

As a result, it’s hard to look through the portfolios to gain a picture of how performance should bounce back as these events move into the past and the initial pandemic-related mark-to-market hit to cat bond values are recovered.

It’s going to be interesting to watch how Stone Ridge’s mutual ILS fund strategies develop over time and whether they can return to stability and perhaps growth.

It seems more likely stability will return to the cat bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund strategy first, while the riskier Stone Ridge Reinsurance Risk Premium Interval Fund may suffer the effects of redemptions for longer and also could carry some pandemic exposure that results in more markdowns or collateral being trapped.

Stone Ridge has expanded its investment operations in reinsurance and ILS in the last year though, launching a direct ILS strategy and underwriting under the Longtail Reinsurance platform based in Bermuda, which resulted in an impressive $1.5 billion being raised for this private ILS strategy.

Even with the decline in assets under its mutual ILS fund strategies due to redemptions, Stone Ridge remains in the top-ten in our Insurance Linked Securities (ILS) Investment Managers & Funds Directory at this time.

But, with the inclusion of the commitments and funds for its private quota share reinsurance investment strategy, Stone Ridge Asset Management likely continues to have somewhere around $5.6 billion of ILS and reinsurance assets under its management.