Stone Ridge’s interval ILS fund shrinks 10% and shifts further to cash equivalents

Stone Ridge Asset Management’s mutual insurance-linked securities (ILS) fund assets shrank again in the last quarter of record, with overall net assets down more than 7% in the period to January 31st 2020.

However, the experience was not evenly shared across Stone Ridge’s two mutual ILS fund strategies, as the managers Interval fund shrank by some 10% in the three-month period, while its more catastrophe bond focused strategy actually grew by more than 4%.

It’s likely a reflection of two things, redemption requests being honoured for the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), which is more focused on investments in collateralised reinsurance quota shares and other private insurance-linked securities. There’s evidence this time around that more redemptions may be expected as well.

As well as growth opportunities being seen for the more catastrophe bond focused Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), which will have been able to take advantage of the much higher level of cat bond issuance in the period.

Overall, Stone Ridge’s mutual ILS fund assets under management declined by over 7% in the quarter to January 31st 2020, with catastrophe losses still weighing on certain assets in the portfolios and the continuing stream of redemption requests being served.

Stone Ridge’s overall assets under management across the two mutual ILS funds ended January 2020 at $5.13 billion, down 7% from the $5.54 billion we reported at October 31st 2019.

Assets in the two Stone Ridge mutual ILS funds have been shrinking for a number of quarters now, having reached a high of almost $7 billion at the middle of 2018 but steadily reduced since, on the back of catastrophe loss payments and some investor redemptions.

But at the same time Stone Ridge also expanded its investment operations in reinsurance and ILS, 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.

Stone Ridge’s more catastrophe bond focused mutual fund strategy, the Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), grew by more than 4% in the quarter to end January 2020, reaching $956 million of assets.

With strong deal flow in the catastrophe bond market seen through the rest of the first-quarter (as we detailed in our new cat bond market report here), it’s possible Stone Ridge will have grown this strategy even more in recent weeks as well.

Stone Ridge’s other mutual ILS fund, the higher risk and reward Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), is more focused on collateralised reinsurance quota shares and private ILS deals, taking more risk and therefore also more losses in recent years.

The Reinsurance Risk Premium Interval Fund has also been subject to investor redemptions, which Stone Ridge hasn’t been shy about servicing, offering up a significant amount of the fund to those investors seeking to exit at each quarterly redemption opportunity.

The Stone Ridge ILS Interval Fund is likely also servicing some clients with loss payments and perhaps still accumulating a little loss creep as well, which on top of the redemptions is driving the continued shrinking of his strategy.

The Stone Ridge ILS Interval Fund ended January 2020 with its total net assets down around 10%, falling to $4.17 billion, down from $4.62 billion at the end of October 2019.

Stone Ridge’s ILS Interval Funds strategy had reached some $6 billion of assets under management, back at mid-2018, but has been shrinking ever since.

We believe it’s likely that some investors have also exited this Interval fund strategy for Stone Ridge’s new private ILS investment offering as well, as the manager has cycled investors into the most appropriate strategy in the past.

There will likely be more shrinkage for the Interval ILS fund over the coming quarter of record as well, as evidenced by changes in the portfolio.

Stone Ridge’s Interval fund holdings of preference shares and participation notes, in sidecars, private quota shares and other private collateralised reinsurance deals, have shrunk by more than one billion dollars in the last quarter of record.

At the same time, the holdings of the Stone Ridge Reinsurance Risk Premium Interval Fund in short-term investments, such as money market funds and treasuries, have increased significantly, to sit at over $1.21 billion at January 31st.

These cash equivalents, or as good as cash as these short-term assets are, may be held there to be reinvested of course, but it could also be there to service more redemption requests.

It also could be part of a strategy to shift private quota shares into the new Bermuda Longtail platform.

It will become clearer how this plays out at the next quarterly reporting for the fund, but we should expect further fluctuation in these assets and the composition of the fund.

At the end of January the Interval ILS fund held the most short-term assets we’ve seen in any quarter, which may suggest the redemption use-case is more likely than reinvestment (again, we can’t be sure though).

Still, Stone Ridge remains one of the top-ten ILS fund managers in our Insurance Linked Securities (ILS) Investment Managers & Funds Directory at this time.

With the inclusion of the commitments and funds for its private quota share reinsurance investment strategy, Stone Ridge Asset Management continues to have close to $7 billion of ILS and reinsurance assets under its management.