Reinsurance As An Alternative Strategy

Larry Swedroe wrote a post about recency bias but I would describe it more as going through the arc of owning an alternative strategy that is doing very well then holding on for a few years where it struggles and then catching the bounce back to a great year. 

The example he used was the Stone Ridge Reinsurance Risk Premium Interval Fund. An interval fund is not one that is available through a secondary market, you buy it from the company directly. This is not a wrapper I have ever considered but for purposes of this blog post I will talk about the traditional mutual fund version of the fund, the Stone Ridge Hi Yield Reinsurance Risk Premium Fund which has two symbols, SHRIX and SHRMX. I believe Swedroe has used the interval fund for clients for many years and I know he has written about it before.

It is an unusual exposure, I am not aware of any other funds that are just reinsurance but if you know otherwise please comment. He notes "after three strong returns in its first three years (2014-16) came a string of losses. SRRIX lost -11.35% in 2017, -6.14% in 2018 and -4.47% in 2019..." He went on to say that in 2023, the interval fund returned 44.6%. The prospectus sets an expectation of these trading like junk bonds but it is not clear if they should be expected to be more or less volatile than high yield. 

Trying to get some context, this is a comparison for the mutual fund version to more traditional high yield and the aggregate index fund.

The mutual fund version took what looks like a different path, year by year, to a noticeably better result.

If high yield is an appropriate comparison, then reinsurance has had higher returns with less volatility. I suspect the difference could be attributable to high yield taking on more equity beta. Where we've talked about convertible bonds having a lot of equity beta, high yield doesn't have as much at converts but has some to be sure.

The mutual fund version models in like quite a few of the alts we look at regularly at, it was only down 3.37% in 2022. I would note that there are some big performance differences between the interval fund and the mutual fund. The mutual fund appears to be less volatile based on Larry's description of the interval fund. A fund whose sole strategy is reinsurance is probably not my first choice. I think some of the other strategies we look at model a little better. 

Swedroe's point though about being able to stick with a strategy, whether for your entire portfolio or just a given holdings, can be difficult at times but if you are going to buy something to hold it, then that's probably what you should do, even during the occasional periods where it lags.

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