Stone Ridge’s mutual ILS funds steady, liquidation of positions evident

Stone Ridge Asset Management’s mutual insurance-linked securities (ILS) fund assets were relatively steady during the last quarter of record, but growth in short-term, more liquid assets held in the Interval structure suggest a liquidation of some private sidecar and quota share reinsurance positions, possibly to service further redemptions.

Overall, mutual ILS fund assets held in Stone Ridge’s two reinsurance linked investment funds fell slightly to $3.8 billion at the end of January 2021, down slightly from $3.82 billion at the end of October 2020.

ILS assets across the mutual funds Stone Ridge Asset Management offers to investors are now down roughly 26% from a year ago, having counted $5.13 billion of ILS and reinsurance linked assets at the end of January 2020.

Stone Ridge has been repositioning its ILS investment management strategy over the last year or so, with an increasing focus on private ILS funds and an expansion into non-catastrophe and longer-tailed lines of business.

In particular, the Stone Ridge interval ILS fund has shrunk significantly, first after the major catastrophe losses of prior years and then through redemptions.

We also believe some of the investors have now moved to Stone Ridge’s private ILS funds and mandates which allocate to reinsurance, as these offer a preferable structure for longer-term, larger investors.

In the latest quarter of record, to January 31st 2021, Stone Ridge’s higher-risk, less liquid interval style mutual ILS fund, the Stone Ridge Reinsurance Risk Premium Interval Fund (SRRIX), shrank by around 5% to $2.68 billion of assets, down from $2.82 billion at the end of October 2020.

At the same time, the investment managers’ more catastrophe bond focused, Stone Ridge High Yield Reinsurance Risk Premium Fund (SHRIX), increased further in size, to end January 2021 up around 12% at $1.122 billion of ILS assets (up from $1bn at the end of October 2020).

The growth in the Stone Ridge High Yield Reinsurance Risk Premium Fund continues as Stone Ridge continued focusing this mutual fund on catastrophe bonds, with now $900 million of the total net assets comprising so-called event linked bonds.

However, the Stone Ridge Reinsurance Risk Premium Interval Fund shows evidence of some liquidation of positions, as holdings in preference shares of collateralized reinsurance sidecars and private ILS quota share deals shrank by around 14% in the last quarter of record.

Holdings of participation notes and catastrophe bonds also declined for the interval fund.

At the same time, holdings in the interval fund of short-term assets, such as money market funds and treasuries, increased significantly, by more than 200% to reach $260.4 million at the end of January.

That likely suggests Stone Ridge was preparing to service redemptions after non-renewing certain positions that were in-force until January.

It seems that some positions were liquidated, either actively or as they matured, to convert the assets to something more liquid and easily saleable to help meet redemption needs of investors.

As a result, it will be interesting to see how Stone Ridge’s interval fund sits after the next quarter, as any redemptions due should have been paid by the end of April.

On top of servicing redemptions, it is also possible that Stone Ridge could be continuing to add more liquidity to its mutual funds, by taking advantage of an active catastrophe bond issuance market through Q1 2021, so it will be interesting to see whether cat bond holdings increase at the next reporting juncture.