Stone Ridge Asset Management, the New York based manager of three mutual funds focused on investments linked to reinsurance and insurance-linked securities (ILS), has opened its first repurchase program offering investors in its Interval fund a liquidity opportunity.
The Stone Ridge Reinsurance Risk Premium Interval Fund which launched towards the end of 2013 is a strategy which invests in more illiquid reinsurance and ILS assets than the managers other two ILS funds, the Stone Ridge Reinsurance Risk Premium Fund and the Stone Ridge High Yield Reinsurance Risk Premium Fund, which both launched at the end of 2012.
Due to the focus on investments with less liquidity the Interval fund cannot offer investors a daily liquidity opportunity, as would be typical of a mutual fund, so instead Stone Ridge offers regular quarterly share repurchase programs which allow investors in the Interval fund to sell back some or all of their shares in the fund.
Through the share repurchase program investors can gain some liquidity if they choose, or step completely out of the fund, however shareholders have to apply through the repurchase program for an opportunity to gain liquidity and Stone Ridge does not guarantee that all will be successful. That allows the manager to cover their backs against a large run on the fund, so they can limit and control the amount of capital flowing out of the fund at any one time. This is important as the manager needs to maintain the collateral it has put up to back sidecars, reinsurance quota shares and catastrophe bond deals.
Stone Ridge launched the first repurchase offer for shareholders in its Interval ILS fund yesterday, April 23rd, and the program will run until May 14th, after which it will be decided how many of the repurchase requests can be honoured.
The repurchase program will see Stone Ridge offer to repurchase up to 7.5% of the aggregate of the funds issued and outstanding shares, which is approximately $45.5m of the roughly $606m of assets under management in the Interval fund. More details on the Interval fund’s breakdown of assets can be found in this recent article.
When we last covered the Stone Ridge funds earlier this month we noted that the Interval fund still had just over $119m of the $606m, or 19.7%, invested in money market funds at the time. That will make this repurchase a much simpler process for Stone Ridge as any shares can be repurchased using capital invested in the money market funds rather than having to liquidate any reinsurance linked investment positions, which would be much trickier we’d imagine.
It is possible that the Stone Ridge Reinsurance Risk Premium Interval Fund will keep at least 7.5% of its investable assets in money market funds at all times, in order to have a more liquid way to recoup the money required to repurchase shares through these quarterly shareholder liquidity opportunities.
The repurchase program will be priced at the Interval fund’s NAV on May 16th, although Stone Ridge can move that if necessary or deemed to be required. There is no charge levied by the fund for the repurchase, although shareholders intermediaries may apply a charge for handling the repurchase as a trade.
If the repurchase program is oversubscribed then the 7.5% could be increased by 2% if Stone Ridge wanted to, increasing the amount of shares repurchased. However when oversubscribed the repurchase will occur on a pro-rata basis up to the percentage being repurchased, which means shareholders will not be guaranteed to get all the shares they apply for repurchased.
The timing of this repurchase program is favourable for Stone Ridge, with the Interval fund likely not having suffered any losses of note to date and being before the start of the U.S. hurricane season. Many of the investments in the Interval fund will see much of their yield come through the wind season, meaning investors will likely be keen to hold onto their positions in the fund at this time.
It will be interesting to see how many shareholders apply for this liquidity opportunity. There are likely to always be some investors who want to free up capital to be put to other uses, but we wouldn’t expect that to be a significant volume of the funds total assets. Perhaps more interesting will be how many shareholders apply for a repurchase program in future quarters, especially if there has been a major catastrophe loss such as a hurricane in the interim period.
Stone Ridge Asset Management’s total insurance and reinsurance linked assets under management, across its three insurance linked investment funds, amounted to just over $1.46 billion at the end of Q1.
Read more on Stone Ridge Asset Management’s ILS funds: