I just read this interesting article about investing in the reinsurance market and how it could potentially provide uncorrelated equities like returns:
http://www.aaii.com/journal/article/diversifying-through-reinsurance-and-marketplace-lending-interval-funds
Reinsurance is insurance on insurance. Companies issuing life insurance, homeowners, fire, causality, etc., may issue policies that are too big or too concentrated for the company, so they sell the policies off, or portions of policies, in the back end to other investors. Basically the same thing as mortgage backed securities but in the insurance world.
The premise of the article is most the risks in this market come from natural disasters and would be uncorrelated from the general stock market themselves, but they still have equity like returns due to them being actual businesses. Having a portfolio that had a portion in these markets could be a good hedge.
The article brings out another interesting thought - that of in general of capturing an illiquidity premium in your portfolio. The funds the author suggests restricts redemptions heavily so it doesn't disrupt their operating capital. Since it's illiquid there should be a greater premium paid for that ask of the investor.
What's your thoughts? Do any of you invest in the reinsurance market? What is the author overlooking?
The only thing that's not clear to me is a lot of insurance companies invest their float directly into the market which would reduce correlations from the equities market in general. I'm not 100% clear on how one would go about getting exposure to the reinsurance market outside the two funds listed, which are closed to investors not using a registered investment advisor.
Notes: In the case of SRRIX even though it has a high stated expense ratio of 4%, part of it is due to SEC regulations in reporting expense ratios. It's high as if you're paying someone else to service a loan you have made those costs are required to be in the expense ratio instead of reduced investment returns, which is the case here in the reinsurance market for this fund. That means their "true" expense ratio is around 2% for management, custodial fees/etc. But the fund doesn't charge its fee on leveraged assets, just the amount invested. They do about a 1.40x leverage ratio so, so the realized expense ratio is around 1.4% (2% / 1.4 leverage ratio = 1.4%). The expense ratio is high but they aren't holding a basket of stocks, they're essentially running a reinsurance business and doing due diligence on what to reinsure, so it's acceptable to have a higher expense ratio.
Submitted July 11, 2018 at 06:06PM by IncendiaryGames https://ift.tt/2L8HDp7
