Alts:new sources of risk/return improve portfolio efficiency

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larryswedroe
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Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 8:42 am

http://www.etf.com/sections/index-inves ... nopaging=1

While the usual suspects of Private Equity and Hedge Funds are not good alternatives, there are two new sources that are, new because until recently they resided on the book of financial institutions and are now available to public. They both provide equity like returns with far less than equity risks, trading off liquidity for lower SD and less downside risk and also low to no correlations.

These two now make up 10% of my own portfolio, and would be more if had more room in tax advantaged accounts. And they are simple and easy to understand

Hope you find this helpful
Larry

Tamalak
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Tamalak » Wed Apr 05, 2017 8:53 am

Woa. This potentially upends my serene little bond/stock world.

One thing I don't get is why reinsurance would have a high risk premium. On an individual level, the rate of say, car accidents has a high volatility and negative downside, but if I insure 10,000 people it feels like the rate of accidents would be pretty steady.
Last edited by Tamalak on Wed Apr 05, 2017 9:04 am, edited 2 times in total.

Da5id
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Da5id » Wed Apr 05, 2017 9:02 am

Interesting article, and nice to see discussion of alternative assets.

I do note that the article contrasts these new funds with hedge/private equity charging 2 and 20 fees, but that the example fund SRRIX has a > 2% expense ratio (2.29%). I'm not sure whether or not that makes it not a worthwhile investment, but my first instinct would be to believe that such a high fee is eating into a good part of my risk premium.

larryswedroe
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 9:03 am

Tamalak
This one is about as simple as can get
Why do you think insurers are in the business?
The premiums are based on
a) costs, distribution, underwriting, etc.
b) EXPECTED losses
C) a risk premium for the unexpected and for putting their capital at risk.

Now insurance has BIG tail risk, which requires big premium. Of course this can be diversified by geography and types of risks. And that reduces tail risks.

Reinsurance funds capture the same return sources, but with much lower infrastructure costs. The share the premium the insurer, or reinsurer charges. In the case of SRRIX they might buy 5% of the book of business of a reinsurer and get about 5% of the premium and take 5% of the losses (though it's a bit less because they cap the losses at the amount of the investment, so in return they don't get the full premium, but don't have all the risks)

Hope that is helpful
Larry

Tamalak
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Tamalak » Wed Apr 05, 2017 9:04 am

Also, I accept that this is a newish kind of public investment so expenses might be higher, but SRRIX's ER of 2.29% "bogles" my mind :shock:

https://www.bloomberg.com/quote/SRRIX:US

Regardless, this is very exciting and I look forward to next week's article on alternative lending from you!

larryswedroe
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 9:21 am

Re ER
The problem is that people don't understand the fund. If this was a simple "index" type of fund, buying the stocks of reinsurers, then the fee would be absurdly high. But this isn't like that AT ALL. You are paying Stone Ridge to run a reinsurance company for you.
And the expected returns are equity like, say 8%, and that is AFTER fees. So let's just round things. The total return, pre expense is 10%, after fees 8%, so you have a reinsurance company with 80% margins and NONE of the huge tail risks that insurers have because losses are capped---cannot lose more than your investment (premiums) while insurers can certainly lose more than the premiums they collect. That is IMO the proper way to look at this.
Now do I wish the fees were lower. Of course. But right now there is no competition so fees might come down if competition comes.
But you need a deep team of reinsurance experts to negotiate contracts, manage the risks, and so on. So it will never be cheap like an index fund.
This is case of getting VALUE for you fee. Too many people focus solely on costs and not enough on the value received which is why one of my favorite expressions is that millions of investors know the price of everything and the value of very little.
Obviously I think it's a good value as I have about 4% of financial assets invested in the fund.
Larry

janeway
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by janeway » Wed Apr 05, 2017 9:30 am

Thanks for the article! Very interesting. It reminds me of when I first read about investing in timber farms. The idea was their return is driven by tree growth which is about as independent of the stock market as you can get. Then I looked into their performance around 2008/09 and saw timber REITs went down with everything else. That's when I realized their long term gains are driven by tree growth but short term prices are driven by the commodities prices. Now when timber prices drop they can leave trees in the ground and harvest later to make up for the previous underperformance but that still means their price drops temporarily when the rest of the market does too.

Is there an equivalent here? I understand the article isn't advocating buying stock in the companies themselves but rather "catastrophe bonds". I just wonder how you think their short term performance will fare during a recession? Also is there an index of these "catastrophe bonds" or as implied in your earlier comment is there more to these bonds than traditional bonds (ie you negotiate directly with re-insurers to determine the bond's terms).

larryswedroe
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 9:38 am

Janeway
First I DO NOT advocate buying CAT bonds, with reason being that they are too concentrated in risks, heavy concentration in US hurricane risks. Rather own diversified portfolio with lots more types of risks and geographically diversified. Also the CAT bonds give up the illiquidity premium as they are liquid. And if don't need liquidity, why not earn the premium?

Second, the reason to invest in the fund and not stocks of reinsurers is the very reason you cite--their balance sheets are filled with stocks and bonds, the very risks you are trying to diversify away.

Third, there is no reason to think that the fund should do poorly in a bad time for stocks. It's certainly possible for that to happen of course, but it will be random. The last bad year for the industry I believe was 2005 when there were several large events that hit insurers, and losses would have been about 15%. That's far less tail risk than stocks which can and have dropped 50% or more. With this we think worst case might be 30% or so (of course anything is possible)

Hope that helps
Larry

janeway
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by janeway » Wed Apr 05, 2017 9:49 am

Larry, thanks for the quick reply! Sorry I misunderstood the reference to CAT bonds. So based on your earlier comment it sounds like the closed-end fund you recommend isn't buying stocks or bonds in reinsurance companies but rather they are directly negotiating contracts with the reinsurers themselves? Is that correct? If so it explains the higher fees and suggests this isn't something that is "indexable".

Da5id
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Da5id » Wed Apr 05, 2017 10:03 am

larryswedroe wrote: Now do I wish the fees were lower. Of course. But right now there is no competition so fees might come down if competition comes.
But you need a deep team of reinsurance experts to negotiate contracts, manage the risks, and so on. So it will never be cheap like an index fund.
This is case of getting VALUE for you fee. Too many people focus solely on costs and not enough on the value received which is why one of my favorite expressions is that millions of investors know the price of everything and the value of very little.
Obviously I think it's a good value as I have about 4% of financial assets invested in the fund.
Larry
I do place very little faith in value added by active investment management, so you are correct there. In this case, there appears to be little ability to tell what proportion of the 2.39% is value add and what is profit for the company. I'll also wait until there is competition and more track record before even seriously thinking about this as an investment category I'd use. I don't believe in free lunches, and don't think I personally understand the risks and failure mode of this "equity like" alternative investment in different markets and under different conditions.

As to the fees, the section in the article says "New Alternatives Without The Fees". While the 2.39% may be a better deal than the 2 and 20 fees (likely hard for it to be a worse deal), I think that is not proven in the article. I do accept that the 2.39% can't be compared to an index fund as there are as you say much more significant operating costs. But no doubt hedge fund advocates (if any remain, not many on bogleheads) would say you are getting lots of research/value for those fees.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 10:46 am

DaSaid
You don't understand this fund and how it works. There have been for long time hedge funds in this space and they are ACTIVE managers, trying to add alpha.

This fund is very different as it buys ENTIRE slices of the books of business of many of the leading reinsurers. It's passive in that sense. It's adding a different beta, but not trying to add alpha.

And obviously unless you think that active managers can do better job than the insurers themselves this is far better than 2/20 that is typical of hedge funds.

And again, I repeat this is business with over century of returns data, so it isn't new at all.

This product is about as clear and transparent as any and easily understood. You are just taking the other side of the trade that no one likes (buying insurance and paying premiums) and getting rewarded with equity like returns (just like the insurance companies) and accepting the lack of liquidity. And that certainly shouldn't matter for those using their tax advantaged accounts and not taking out more than RMD.

I'd have more in it except for don't have more room in tax advantaged accounts, and it's all current income.

This is like the Holy Grail of investing, equity like returns that are totally uncorrelated, reducing SD of portfolio and tail risks and creating a much more efficient portfolio.

Larry

garlandwhizzer
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by garlandwhizzer » Wed Apr 05, 2017 11:55 am

Personally I don't know enough about re-insurance to develop an intelligent opinion. Larry makes a convincing case for it. On the other hand, Warren Buffett, who has invested in this area for quite some time, feels that the re-insurance sector's best days are behind it, that the space is now getting too crowded with hedge fund money, and that the historical ability of re-insurance companies to make significant capital gains from their diversified investments in the future will be diminished. He feels the risk/reward balance has shifted unfavorably in re-insurance and has recently lightened Berkshire's holdings in this area. I don't know who's right, Larry of Warren, but two knowledgeable and experienced experts have come to conflicting points of view at the same time on the same asset class. So it goes in markets: the buyer believes it's future is sunny, the seller believes its future is stormy,

The following is web address of an article "Buffett on Reinsurance"
Garland Whizzer

betablocker
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by betablocker » Wed Apr 05, 2017 12:13 pm

Didn't Buffett sell the stock and not reinsurance contracts? I think the point of this fund is that doing business with reinsurance funds is a good idea, not that the reinsurance business itself is a good one.

psteinx
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Wed Apr 05, 2017 12:56 pm

[NOTE/EDIT - I'm leaving the body of this post below intact, but will note that it appears that my assumption that the fund(s) in which SRRIX invests charge 0.16% + 15% of net profits was mistaken, invalidating the math that flows from that. I now think (but am not certain, the prospectus is confusing), that the 0.16% is the amount of fees/net profits incentive/etc incurred by the underlying fund(s) in the year to 10/16/2016, but that this number could go higher (or lower) at other times. See page 13 of the prospectus for general discussion of fees, and footnote 3 for the 15% issue.]
==========================
Da5id wrote:I do note that the article contrasts these new funds with hedge/private equity charging 2 and 20 fees, but that the example fund SRRIX has a > 2% expense ratio (2.29%). I'm not sure whether or not that makes it not a worthwhile investment, but my first instinct would be to believe that such a high fee is eating into a good part of my risk premium.
Actually, the fees are higher than that I think, especially for a retail investor who would likely be paying advisor fees as well.

Here's a link to the prospectus.

As I understand it, the fees are approximately:

Parent fund (SRRIX): 2.26%
Fund(s) in which SRRIX invests (i.e. acquired funds): 0.16% + 15% of net profits
Maximum repurchase fee (when you sell): 2% (The fund does not appear to be charging this now, but can)

Finally, per this page, it appears that this fund is only offered to institutional investors, their clients, and "certain other eligible investors". It sounds like the most likely avenue for a retail investor who actually wanted into this fund would be through an advisor. These advisors often charge an AUM fee. Let's assume what I think is a not too high AUM fee of 0.75%:

So, to walk through a semi-real world example. We'll assume a 5 year holding period, and that the maximum repurchase fee IS paid on exit. (BTW, selling this investment may be difficult as well - they only commit to buying back 5% of outstanding shares per quarter, but that's a different issue.)

Let's assume the underlying as doing pretty well - 10% per year returns - sweet!!!!

OK, so, annual fees:

Raw return = 10.0%
less performance fee 15% of that, so = -1.5%*
less fund fees (acquired fund) = -.16%
less parent fund fees = -2.26%
less AUM fees for advisor = -0.75%
(* Note, it's not clear if that 15% is before or after the .16%, so this may be a bit off.)

Basic annual return = (about) 5.33%

So $10K compounds, over 5 years, to $12,964.64

Now let's deduct that repurchase fee - again we're assuming 2% (per the prospectus), even though it's not being charged at the moment.

Final total: $12,705.35
CAGR: 4.91%

So, even though we've assumed a pretty high return to start (10%), the investor is left, at the end of the fee trail, with about 4.91%. The various fees, funds, advisors, etc, take a bit over half of the raw return.

Larry, or others, please correct if the above is incorrect. In particular, the relationship (and fees) between the parent fund, SRRIX, and the fund(s) in which it invests, which seem to levy their own steep costs (at least as incentive fees) is kinda murky on my fairly quick look at the prospectus.

Addendum: Fees to an RIA are not necessarily purely for access to this or other funds (DFA, etc.), and they generally provide various services bundled into that fee which may provide value to investors. That said, I think a large proportion of the folks reading this likely pay little or no AUM fees to an RIA.

EDIT - I had included what I thought were the fees for Larry's specific firm, but another poster pointed out below that the link & fees I was using were for a similarly titled, but apparently different advisor. I've edited the above to assume lower RIA fees and remove the direct tie to any RIA firm.
Last edited by psteinx on Thu Apr 06, 2017 8:37 am, edited 3 times in total.

Random Walker
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Random Walker » Wed Apr 05, 2017 1:11 pm

Psteinx,
I think the fee schedule you have linked is not Larry's firm. Larry's firm is Buckingham Asset Management. This appears to be called Buckingham Capital Management.

Dave

psteinx
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Wed Apr 05, 2017 1:23 pm

Random Walker - thanks for pointing this out. I've edited my previous post.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by dave_k » Wed Apr 05, 2017 4:21 pm

I'm interested to hear Larry's response to psteinx. I'd like to know what the actual total costs are likely to be and the least expensive way to purchase the fund in an IRA. I can't purchase it through my Fidelity brokerage account.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 5:36 pm

psteinx
Your analysis is virtually entirely incorrect--exception being have to work with advisor to access.
The fund's expense ratio is 2.42%. There are no redemption fees of any kind. There are no incentive fees of any kind. The only expense is the 2.42%. Now you may need to use an advisor to access the fund, and obviously if that is the only reason you would pay an advisor that fee, whatever it would be, should be added. But if there are others reasons, you view the advisor is adding value, then it isn't an extra fee but a fee that is adding more value than it's cost or you would not be paying it.

As to advisors, there are very low cost advisors that even charge low flat fees who may have access. That I don't know.

Stone Ridge has chosen to operate like DFA, to keep their distribution and operating costs down. No 800 numbers, etc. And they will work with a very small % of the number of firms that DFA works with because there isn't the capacity in their funds that there is with DFA which now has thousands of advisors and over $400b of AUM.

Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by JoMoney » Wed Apr 05, 2017 6:40 pm

garlandwhizzer wrote:Personally I don't know enough about re-insurance to develop an intelligent opinion. Larry makes a convincing case for it. On the other hand, Warren Buffett, who has invested in this area for quite some time, feels that the re-insurance sector's best days are behind it, that the space is now getting too crowded with hedge fund money, and that the historical ability of re-insurance companies to make significant capital gains from their diversified investments in the future will be diminished. He feels the risk/reward balance has shifted unfavorably in re-insurance and has recently lightened Berkshire's holdings in this area. I don't know who's right, Larry of Warren, but two knowledgeable and experienced experts have come to conflicting points of view at the same time on the same asset class. So it goes in markets: the buyer believes it's future is sunny, the seller believes its future is stormy,

The following is web address of an article "Buffett on Reinsurance"
Garland Whizzer
I was thinking the same thing
https://www.bloomberg.com/news/articles ... e-too-much

In general I don't think 'new' financial products being sold to average investors is a good thing. Buffett has said that in reinsurnace you have to “be willing to walk away if the appropriate premium can’t be obtained.”. I doubt too many people out there are in a good position to make those kinds of judgments. If this was some panacea I doubt institutional investors would be leaving room at the table in this low interest rate environment. We're certainly not in some sort of cash crunch where there's a shortage of money looking for places to invest.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

psteinx
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Wed Apr 05, 2017 7:07 pm

Larry:

The fees I listed are from page 13* of the prospectus I linked.

*Page # references using the page number at the bottom of the pages, not the pdf page #.

The 15% incentive fee is indicated on that page, in note 3, albeit somewhat unclear. As I reread it, perhaps it hasn't amounted to much, yet, and perhaps may not amount to much in the foreseeable future. Specifically, note 3, for "Acquired Fund Fees and Expenses" of 0.16%, says:

"(3) Represents fees and expenses of the funds in which the Fund invested during the fiscal year ended October 31, 2016. It is based on the assets invested in each fund and the fees and expenses including incentive fees or allocations charged by each fund. The fund in which the Fund invests typically charges 15% of net profits as an incentive fee or allocation. Amounts incurred by the Fund may be substantially higher or lower in the future because the performance of the funds may fluctuate and the Fund may invest in different funds from time to
time."

At a minimum then, I probably was mistaken in my example calculation in counting a 1.5% incentive fee (15% of an example 10% raw return) AND the 0.16% acquired fund fees - it seems that the 0.16% captures the most recent incentive fees. Still, it's confusing. Why the small 0.16%, given the 15% "incentive fee or allocation", and that SRRIX had had a pretty good year up to 10/31/16 (per page 14)?

Perhaps only a small % of the main fund, SRRIX, is invested in a fund that charges the incentive fee? Dunno. The footnote says it represents "fees and expenses of the funds in which the Fund invested", implying that SRRIX invests in multiple funds with their own fees and expenses. But right after that it says, "The fund in which the Fund invests typically charges 15% of net profits as an incentive fee or allocation", suggesting that there is one fund that SRRIX invests in, which in turn charges the 15%. It's not very clear to me. FWIW, I looked at the rest of the prospectus (basically, a skim, not a close read), and didn't see anything that really clarified this for me. In fact, I don't think I saw any clear reference to a sort of parent (SRRIX)/child (some fund that SRRIX invests in, which charges an incentive fee), though perhaps it's there somewhere. There's more detail starting on page 15 of the prospectus, "PRINCIPAL INVESTMENT POLICIES"...

As for "There are no redemption fees of any kind.":

Page 13 of the prospectus:
"Maximum Repurchase Fee(1)" 2.00%
And for footnote 1:
"The Fund does not currently charge a repurchase fee. However, the Fund may charge a repurchase fee of up to 2.00%, which the Fund would retain to help offset non-de minimis estimated costs related to the repurchase."

So, by my reading, they are not charging the 2% now, but could in the future. I say as much in my post upthread, "Maximum repurchase fee (when you sell): 2% (The fund does not appear to be charging this now, but can)", though I don't repeat the caveat further down, and perhaps I am being ungenerous in assuming that this allowed fee will be charged in the future. That said, they are certainly entitled to charge the fee, by my reading, and others reading THIS can render their own judgement as to the likelihood of it being charged in the future. Also, note the fund may limit quarterly redemptions to 5% of shares outstanding. If things go badly for this fund, and investors try to flee, it's at least possible that it may take years for investors to get your money out, all the while subject to rather high (in my opinion) fees & expenses, including, possibly, the redemption fee.

I don't think there is substantial disagreement between us that for retail investors, this fund is mainly accessed through advisors, that many such advisors charge fees of their own.

As for Stone Ridge's motives in working through advisors, I did not speculate in my first post in this thread. You point out some advantages for Stone Ridge in your post (though I'd suggest that with 2.1% for Stone Ridge in Management and Service Fees, in addition to the other listed expenses, that perhaps their budget is not entirely bare bones...) I would add that a policy of offering such a fund only through advisors might present some sales and marketing advantages to Stone Ridge (and to others with similar policies, such as DFA).
Last edited by psteinx on Wed Apr 05, 2017 7:31 pm, edited 1 time in total.

larryswedroe
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Wed Apr 05, 2017 7:19 pm

psteinx
First, I can assure you that the ER is 2.42 and that is all. What is in prospectuses is often basically meaningless because they are written in such a way that they don't have to go back to shareholders every time they want to change anything, however minor. So you'll see many strange things in prospectuses. And there is no incentive fee nor any redemption fee nor is there ever likely to be either.

Second, the advantages of no retail is much lower expenses to operate, DFA for example has small fraction of employees of similar sized mutual fund companies. And they don't have to deal with retail investors chasing returns and creating frictions for existing investors, and they don't have to deal with tracking error issues. And in this case a fairly complex product because of the interval nature of the fund. So best left to have advisors spending time explaining the issues. At least that is their view I believe.

Third, you cannot access interval funds in 401k plans UNLESS you do so in a self-directed brokerage account set up within the plan. You can of course own them in IRAs.

Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Wed Apr 05, 2017 7:47 pm

Larry: Perhaps your clients take full comfort in your assurances. Personally, if I were considering this investment, I hope I'd look to the prospectus itself for fee information. Particularly as, if this fund were to head in unattractive directions, via:

1) Poor performance
or
2) Charging the prospectus listed "Maximum Repurchase Fee"
or
3) Experiencing bloating in the "Acquired Fund Fees and Expenses", including but not limited to the "15% of net profits as an incentive fee or allocation" that is described right there in the prospectus (albeit, apparently, not amounting to as much as that might imply in the year to 10/31/16).
or ????

THEN, investors heading for the door might be gated at 5% maximum redemption per quarter, and, again, subject, potentially, to the various fees, including, possibly, the "Maximum Repurchase Fee".

How realistic is a possible investor stampede out of this product at some point in the future? I don't really know. I don't know a lot about this product or products of its ilk. But I would offer that, if the product has substantial exposure to insurance risk, then IF a major insurance risk happened (as but one example, a major hurricane), causing very poor returns in the product, THEN it seems possible that many investors would look to exit at once. The fact that they might then be constrained to 5% redemptions per quarter might cause bad publicity which might further increase the number of investors seeking to redeem.

Also, if I understand it correctly, the 5% floor per quarter is on redemptions of outstanding shares. Some might think that this means, worst case, you could get out fully in 5 years (20 quarters, at 5% per quarter). But my guess is that if 5% of shares were redeemed in a quarter, then the base upon which the 5% floor is computed for the next quarter would be lower, and essentially this thing could drip down slowly over a time period much longer than 5 years.

psteinx
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Wed Apr 05, 2017 8:07 pm

Oh, one other very minor point in SRRIX's favor on fees and expenses : 0.01% (1 bp) of the listed amount is for "Interest Payments on Borrowed Funds". I presume that for the period upon which this is calculated, this is a leverage cost, and presumably, the borrowed funds are being deployed to generate extra income (hopefully) for the investor, which to me, puts it in a different category from the other fees and expenses. That said, it's only 1 bp (in the relevant timeframe anyways), but there ya go...
Last edited by psteinx on Wed Apr 05, 2017 9:26 pm, edited 1 time in total.

stlutz
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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by stlutz » Wed Apr 05, 2017 8:19 pm

One thing the prospectus makes abundantly clear is that this is a "risky" and "speculative" investment.

On the cover page, it says, "An investment in the Fund’s Shares should be considered speculative and involving a high degree of risk, including the risk of a substantial loss of investment." In the special risk considerations section, it states, "An investment in the Fund involves a high degree of risk. The reinsurance-related securities in which the Fund invests are typically considered “high yield” and many reinsurance-related debt securities may be considered 'junk bonds.'" The words "risky" and "speculative" are repeated over and over in the prospectus.

Doesn't make it a bad investment--just pointing out that Stone Ridge seems to very strongly disagree with Larry's assessment on the riskiness of this investment.

That said, the returns the past 3 years of existence are very consistent, 7.8%, 8.3%, and 8.4%. :happy

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 8:12 am

Craziness
People just don't understand what goes into prospectuses. Stlutz's comments in particular show this lack of understanding. If you look for example at DFA prospectuses they often contain statements that will almost certainly never happen but lawyers draft these documents to cover any and all circumstances. So you get language like this. And that is why firms like ours spend long time doing due diligence. In this case about 3+ years getting to know the firm and the industry and the issues.

Clearly investing in insurance is risky and involves the risk of loss. Gee that is news. But of course there is an expected profit and 150 years of reinsurance history --and Warren Buffett even owns a reinsurance company.

The fund holds some CAT bonds as liquidity to meet the redemption gate of 5%. That way they don't have to hold cash which acts as a drag. The CAT bonds provide liquidity while also providing a return. Those are clearly risky investments. And they are reinsurance risks of the same type the fund insures.

And investors should not expect to get out more than 5%---there's no other fee if there is room for YOU to get out, which you can if less than 5% of outstanding shares are not redeemed. Note that illiquidity is why the expected return is equity like with about 1/2 the volatility of equities and no correlation at all to equity. Now if you need liquidity then should not invest. But very few investors we work with, if any, take more than required RMD and even at age 90 you aren't close to 20% a year, which is the LEAST you can get out.

JOMONEY
This is about as far from a "new product" as anything I can think of. Reinsurance has been around for over 150 years. It's just that this is the first time that this has been available in the form of a 1940 Act fund. Prior to now it has resided only on the balance sheets of insurers and hedge funds. Stone Ridge just brought it to the public in 40 Act vehicle for first time. So it's not new at all, other than it's availability. And the fund isn't trying to add value via alpha, picking which risks to reinsure, so that risk isn't there. They buy a slice of a reinsurers entire book of business, so no cherry picking by reinsurers either.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Thu Apr 06, 2017 8:52 am

The returns on this fund were good and stable from commencement of operations (12/9/2013) to at least 10/31/2016 (last date discussed in prospectus), and probably on through to today. But that's less than 3.5 years.

The main thing that would seemingly harm performance would be a catastrophic event (perhaps something along the lines of Hurricane Katrina or 9/11 or Sandy). Events of that scale are somewhat rare, but obviously not TOO rare. So it would seem fairly difficult for an outsider, non-expert on this type of product to assess how exposed this fund might be to such an event. Does the next Katrina type event hurt performance in that year by 0%, 1%, 5%, 25%, 50%, 90%? Yes, an expert in this type of product, and particularly one who has closely examined the portfolio of SRRIX, might have insight into realistic expected losses, but I for one don't.

And frequency exposure is similarly tough for a non expert to gauge. Is this fund likely to take a hit with every big storm, plane crash, or the like, or will it only be exposed to a fraction of them? How frequent will the big, economically damaging storms/hurricanes be in years ahead? I don't think that past frequency is entirely informative here, given climate change and also, perhaps, higher levels of development along/near certain coastlines.

To me, it seems an interested typical retail investor has limited choices:

1) Do considerable research into the portfolio of SRRIX and the performance of comparable investments going back many years
2) Wait a lot of years to see how this thing does over the long haul
3) Simply trust Larry or one's own advisor that this is a good investment, without really performing their own due diligence

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by psteinx » Thu Apr 06, 2017 8:56 am

Oh, and if you choose option #1 (your own due diligence), note Larry's opinions that you can't really accept what's in the prospectus at face value. I'm not saying I entirely agree, but if that IS true, then it suggests that your own due diligence likely should go well beyond the prospectus.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 9:02 am

Psteinx
There is data on insurance returns going back very long time. Based on the historical evidence we believe the SD of returns will be about 10%, with some left skew (obviously can have big losses but not huge gains). 2005 was the last bad year, with three catastrophic type events, and we estimate losses for the fund would have been about 15%. Now you then have to think about what is worst possible case, so we doubled that to 30%. Of course can be worse, just as stocks lost 90% in Great Depression.
So with expected return say of 8% and SD of 10% you can basically model return distribution.

Note that the insurance industry now writes a far wider spectrum of risks, reducing the tail risks of the portfolios. They write insurance now on hacking, and concert cancellation, and athlete injury risks, and transportation of goods, and on and on. So while each risk has a big tail, the lack of correlation among them greatly reduces the tail risk of a diversified portfolio. Yet each premium reflects the tail risk of that product itself.

The data is there to do estimate returns. Just as it is for alternative lending as Fed has data going back decades.

This type of due diligence is what an advisor should be doing.

Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 9:16 am

I thought it worthwhile to give example of how lack of knowledge and simple reading of prospectuses leads to really bad conclusions that people draw. I've raised this before in other examples. So I'll do it again here. This has to do with the incentive fees mentioned above re the prospectus.

First, it has NOTHING to do with incentives or Stone Ridge getting a fee. Stone Ridge enters into contracts with reinsurers in which it 5% of the risks. But the risks are capped at the investment and SR has none of the expenses of originating the insurance contracts. Those two things mean it should not get 5% of the premiums. So let's say they get 4.5% of the premium as an example, giving up that 0.5% for the capping of losses and for sharing the expenses. That 0.5% is required by the SEC to be shown as an expense of the fund. And that is what that is about. It has nothing to do with any incentive or IMO any expense of the fund either. But it's required.

That is a good example of the problem with reading prospectuses without understanding their nature

Note this is virtually the same issue that was raised regarding the SR alternative lending fund. The SEC requires SR to show as expense of the fund the servicing fee retained by the servicer of the loan. That inflates the ER of the fund. That's not really an expense it's just lower return (and the fund doesn't have to pay the expenses of servicing the loan) in the same way that if you buy a mortgage fund the fund doesn't show as expense the servicing fee kept by the servicer of the mortgage. The SEC is just using dumb rules IMO which inflate the ER of funds. But that's the rules so funds have to show that.

Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by frisco » Thu Apr 06, 2017 9:37 am

What is an appropriate benchmark for a fund like SRRIX which invests in quota shares, industry loss warranties and catastrophe bonds?

The BofA Merrill Lynch 3-Month T-Bill Index, Swiss Re Global Cat Bond Index and AON Benfield All Bond Index are possibilities, but don’t fully align with the fund’s investments.

Does it make sense to compare the performance of SRRIX to the performance of another fund investing in this area (e.g. Pioneer ILS Interval Fund XILSX)?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by aristotelian » Thu Apr 06, 2017 9:40 am

Very interesting. It's an interesting model that sounds more like TIAA's Real Estate fund than a typical mutual fund. I would like to keep an eye on this as the track record isn't there yet. It would be curious to see what happens to the expenses if there are a couple of competitor funds to keep each other honest.

I am interested to read the follow up piece on student loans. There is some speculation in the higher ed field that it is a bubble that is ready to burst. There is no historical data that you can look at because the higher ed economy is such a recent development. People have only started going to college en masse in the last 20 years or so.
Last edited by aristotelian on Thu Apr 06, 2017 9:48 am, edited 1 time in total.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 9:44 am

aristotelian
The type of student loans that SOFI makes and LENDX purchases are SUPER PRIME loans, not the type you are seeing the bubble in
Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Da5id » Thu Apr 06, 2017 9:53 am

aristotelian wrote:Very interesting. It's an interesting model that sounds more like TIAA's Real Estate fund than a typical mutual fund. I would like to keep an eye on this as the track record isn't there yet. It would be curious to see what happens to the expenses if there are a couple of competitor funds to keep each other honest.
It is also currently not practical to implement for the (apparent?) majority of bogleheads who don't use advisors, as the only fund in question sells through that channel. Even if one does use an advisor, according to Larry higher up in the thread the company sells only to a small subset of advisors compared to DFA. Still interesting to read/think about.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by frisco » Thu Apr 06, 2017 9:55 am

On the topic of cat bonds (one investment in this space), I enjoyed “Understanding Cat Bonds” from AQR’s Andrew Sterge and Bernard Van der Stichele, published in The Journal of Alternative Investments: https://www.aqr.com/library/journal-art ... -cat-bonds. Examines history, past return, correlation, risk, modeling.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by siamond » Thu Apr 06, 2017 10:00 am

Just trying to understand a bit better here... Larry said in his article:
It’s important to understand that the equity like expected returns (6-8% after fund expenses) associated with accepting the risks of investment in reinsurance are compensation for the risk of occasional large losses.
How do we know that (the expected returns)?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 10:37 am

siamond, by looking at the historical evidence--that's how you make estimates of returns.
You also might look at insurance company stocks.
Note insurers don't write business to earn bond like returns as there is much more risk, which the premiums reflect. And in fact they are equity like returns because they entail left tail skewness and kurtosis, with chance of large losses (investors are risk averse and willing to pay large premium to avoid those risks)

Simple and common sense/intuitive explanations for the equity like returns
Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Phil DeMuth » Thu Apr 06, 2017 11:12 am

I was wondering if I already had exposure to this space via Berkshire Hathaway. Answer: no, unfortunately. Correlation the between BRK and SSRIX for the past three years is 0.07. Correlations to other reinsurers are also very low:

Swiss RE -0.07
Hannover 0.06
Munich RE 0.18

The highest relevant correlation I could find was to White Mountains, 0.41, which still isn't much.

If one loved reinsurance, one could cobble together a combination of the above companies. It would usefully diversify most portfolios, although not with the same efficiency as SSRIX.

A couple of thoughts, reading through the thread. An bad earthquake is not going to seriously damage a fund like this. It would take an improbable combination of bad events. Because this can happen, it likely will given enough time, but it's not like owners of SSRIX need to scour the headlines every morning for signs of disaster so they can try to get out.

Also, the 5% gate is a good idea, a feature not a bug. The last thing one wants is for there to be a run on the fund the year it goes down 25%. That would be a poor time to exit and if I were an owner the last thing I would want is a lot of idiots trying to cash out at such a time.

In short, I concur with Del Shannon: Hats off to Larry.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by siamond » Thu Apr 06, 2017 11:14 am

larryswedroe wrote:siamond, by looking at the historical evidence--that's how you make estimates of returns.
Yes, ok, sure, but I was asking for more specific pointers... SRRIX has a very short history. You must have some specific data series in mind. How can we find that? Or some in-depth analysis by an author or another?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by betablocker » Thu Apr 06, 2017 11:39 am

I'd assume you can estimate returns based on data about past reinsurance returns. No different than estimating returns for stocks over bonds. I think there are some cognitive biases in play in the resistance to this investment. Many Bogleheads figured out that the investment industry is full of crooks and that low cost index funds with a simple, diversified asset allocation is the way to go. You buy and hold and maybe rebalance every once in a while. I'm one of those people and Larry wrote a book about it. Now Larry comes along and says that there are these new products available which allow more investors access to new forms of risk and every defense mechanism goes up: fees, advisors, etc. Add to that having to accept that the simple world of even 5 years ago now feels more complicated and the idea that you can't do it yourself without accessing an advisor and the walls go up. I'm not saying everyone should go find an advisor to buy SSRIX but the resistance to it seems like it's about something else than the facts of the fund or investment.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by Da5id » Thu Apr 06, 2017 11:59 am

betablocker wrote:I'd assume you can estimate returns based on data about past reinsurance returns. No different than estimating returns for stocks over bonds. I think there are some cognitive biases in play in the resistance to this investment. Many Bogleheads figured out that the investment industry is full of crooks and that low cost index funds with a simple, diversified asset allocation is the way to go. You buy and hold and maybe rebalance every once in a while. I'm one of those people and Larry wrote a book about it. Now Larry comes along and says that there are these new products available which allow more investors access to new forms of risk and every defense mechanism goes up: fees, advisors, etc. Add to that having to accept that the simple world of even 5 years ago now feels more complicated and the idea that you can't do it yourself without accessing an advisor and the walls go up. I'm not saying everyone should go find an advisor to buy SSRIX but the resistance to it seems like it's about something else than the facts of the fund or investment.
I suppose. My inclination is to not change my investment strategy without good reason. There will always be new investment opportunities/factors/trends/fads. I think viewing them with with suspicion is generically the prudent course, and the strong default should be to not change what your are doing.

And fees, whether or not advisor based, should always be a consideration in selecting investments.

YMMV

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by stlutz » Thu Apr 06, 2017 12:01 pm

People just don't understand what goes into prospectuses. Stlutz's comments in particular show this lack of understanding. If you look for example at DFA prospectuses they often contain statements that will almost certainly never happen but lawyers draft these documents to cover any and all circumstances. So you get language like this.
Larry: Let me just ask a straightforward question. Suppose I had a 50/50 stock bond portfolio, but I wanted to to move 10% of my portfolio into this fund. What should my new portfolio mix be if I didn't really want to the change the overall risk profile of my portfolio?

By reading the prospectus, I would conclude I should be 50% bonds, 40% stocks, and 10% SSRIX.

What is your judgement on the matter?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by betablocker » Thu Apr 06, 2017 12:42 pm

Da5id wrote:
betablocker wrote:I'd assume you can estimate returns based on data about past reinsurance returns. No different than estimating returns for stocks over bonds. I think there are some cognitive biases in play in the resistance to this investment. Many Bogleheads figured out that the investment industry is full of crooks and that low cost index funds with a simple, diversified asset allocation is the way to go. You buy and hold and maybe rebalance every once in a while. I'm one of those people and Larry wrote a book about it. Now Larry comes along and says that there are these new products available which allow more investors access to new forms of risk and every defense mechanism goes up: fees, advisors, etc. Add to that having to accept that the simple world of even 5 years ago now feels more complicated and the idea that you can't do it yourself without accessing an advisor and the walls go up. I'm not saying everyone should go find an advisor to buy SSRIX but the resistance to it seems like it's about something else than the facts of the fund or investment.
I suppose. My inclination is to not change my investment strategy without good reason. There will always be new investment opportunities/factors/trends/fads. I think viewing them with with suspicion is generically the prudent course, and the strong default should be to not change what your are doing.

And fees, whether or not advisor based, should always be a consideration in selecting investments.

YMMV
In general I agree and reinsurance isn't new. It's just newly available to more retail investors. Seems like more types of risk will be commoditized going forward and sold retail. That's a good thing but it will be tough for the do it yourselfer to keep up.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by aristotelian » Thu Apr 06, 2017 2:06 pm

betablocker wrote:I'd assume you can estimate returns based on data about past reinsurance returns. No different than estimating returns for stocks over bonds. I think there are some cognitive biases in play in the resistance to this investment. Many Bogleheads figured out that the investment industry is full of crooks and that low cost index funds with a simple, diversified asset allocation is the way to go. You buy and hold and maybe rebalance every once in a while. I'm one of those people and Larry wrote a book about it. Now Larry comes along and says that there are these new products available which allow more investors access to new forms of risk and every defense mechanism goes up: fees, advisors, etc. Add to that having to accept that the simple world of even 5 years ago now feels more complicated and the idea that you can't do it yourself without accessing an advisor and the walls go up. I'm not saying everyone should go find an advisor to buy SSRIX but the resistance to it seems like it's about something else than the facts of the fund or investment.
Good points. I would also add, aren't the insurers mostly publicly traded companies? So if I am invested in TSM I am already invested in these companies by market weight. So this comes down to a form of sector based "diversification", not unlike REIT. You are concentrating in a particular sector that may be theoretically decoupled from the stock market but expected to produce similar returns.

Is there some theoretical reason why the reinsurance industry would not be prone to ups and downs, like any other sector? Does it never have bad years? Do we know how it did after Katrina, or the SF earthquake? If it is always profitable, shouldn't someone be smart enough to come around and offer cheaper reinsurance?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 2:18 pm

Few things I can add here that might be helpful

First, re the gates. They are good thing, not bad thing. They allow the fund to operate efficiently and take longer term positions, negotiating strategic relationships with reinsurers. That allows the fund to cut better deals, more favorable.

Second, the strategy of working with advisors is important in that the advisors by working with clients get the clients to be committed capital and not investors that will panic after big loss but will instead be adding capital. In fact SR has already set up a side car fund that has indications of committed capital to invest AFTER big losses, which is exactly when you want to invest because premiums go up. The "committed" (meaning long term buy and hold) capital increases the odds of being able to get out, something a retail fund would have problems with after big losses. Also on this score, it's important to understand that most quota share deals are one year. And if many investors wanted out, they could simply let the quota shares expire and then return capital to investors. Also the CAT bonds held are mostly highly liquid. This again allows for stronger negotiating position with the reinsurers who want committed capital partners. Thus even in the "end of world" scenario it's highly likely you would be able to get out even before 5 years, though one should not invest based on that idea.

Third, actually I mistated the real ER of the fund is NOT 2.42 but more like 2.26 currently because of the inclusion of fees that should not be there (they relate to the contracts with the reinsurers, related to cost sharing/revenue sharing). So it's actually a bit less than I had stated. Just checked to confirm that.

As to Phil's comments, the point you make about low correlation is EXACTLY why we decided not to go the route of simply creating our own separate account "index fund" of reinsurers which we could easily have done even ourselves for our clients. Simple, just equal weight say the top 10 and rebalance annually. But reinsurers correlation to equities is much higher due to what's on their balance sheets. We want to isolate the reinsurance risk. Hence our choice of this fund.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by garlandwhizzer » Thu Apr 06, 2017 5:39 pm

Once again I'll preface my remarks with the fact that I don't know enough about re-insurace as per Larry's suggestion to form an educated opinion. In general however the theory seems to be that re-insurance risk is for rare events but when it occurs its likely associated with a devastating event. Hence the high risk cost in the premium paid by insurance companies. In essence it allows insurance companies to take more risk with their investment portfolios because if disaster occurs to the company they have backup. When devastating events occur one thing is common in all of them: very few entries be they people of companies have any free liquid cash left. So insuring for such a catastrophe when it is likely that insurance company assets would be under severe pressure, likely bankrupt or close to it, in theory should demand a high premium. A high premium structure for something that very rarely happens has the potential for substantial profits, especially in relatively untroubled economic times like we've had for the past 3 years when SRRIX has had excellent returns. The problem is that the kind of risk they insure for, severe rare events, hasn't yet shown up in their short lifetime of 3 years. Betablocker's point that we should project 3 years of SRRIX past returns indefinitely into the unknown future seems to me to be a bit of a stretch. When a global economic disaster of sufficient consequence hits you'll get an accurate picture of the risk involved in re-insurance contracts just as you did in the housing collapse when private mortgage insurance companies which were supposedly solid went bankrupt in massive numbers.

Severe disasters, the kind when SRRIX's profits would be expected to be under pressure due to outflows, include for example devastating worldwide economic events such as the Great Depression, or a major international political event such as a world war, or a major global environmental catastrophe (asteroid strike, eruption of mega-volcano such as Yellowstone, runaway global warming), perhaps even a totally unforeseen event such as nuclear attack by a terrorist organization. Horrible events like that are very unlikely but they are possible and their effects don't show up in the annual profit reports of re-insurance companies until they do. In order for a re-insurace entity to remain solvent at such a time they would have to structure their global investment portfolio (which has been funded by their generous premiums) extremely well, such that they are relatively unfazed a tragedy that has devastated regular insurance companies. To be effective this portfolio requires a very high level of persistent operator skill, producing solid annual returns but at the same time being prepared for severe disaster at any point in time. One wonders if diversification alone would suffice.

In a low yield world with huge volumes of savings looking desperately for yield/income one wonders how this re-investment niche can produce equity like returns with bond like risk. It appears that they are off the traditional curve for risk/reward tradeoff in the fixed income market due to their higher return and in the equity market as well due to their lower risk. Perhaps they have identified a sweet spot, overlooked by other professionals, a sweet spot that with consummate skill can be mined for excess returns at lower risk. Larry is a very smart and very knowledgeable market maven and he is on board, so there must be something to this. Personally, I don't understand the nuts and bolts of how to identify and exploit such opportunities. One of my rules of investing, learned the hard way over 3 decades, is not to invest in anything I don't understand and this approach clearly falls in that category for me. I wish good luck to those who do give it a try and will follow their results from the sidelines.

Garland Whizzer

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by junior » Thu Apr 06, 2017 7:07 pm

psteinx wrote:Oh, and if you choose option #1 (your own due diligence), note Larry's opinions that you can't really accept what's in the prospectus at face value. I'm not saying I entirely agree, but if that IS true, then it suggests that your own due diligence likely should go well beyond the prospectus.
Who in this thread is savvy enough to do due diligence on an exotic investment product? My guess would be most people are not. I consider myself not capable of evaluating the accuracy of Larry's advice so for me it is not actionable.

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Thu Apr 06, 2017 8:53 pm

Garland
Much of what you say is incorrect. For example,
Severe disasters, the kind when SRRIX's profits would be expected to be under pressure due to outflows, include for example devastating worldwide economic events such as the Great Depression, or a major international political event such as a world war,
First, depressions don't cause insurance losses at least of the kind SRRIX insures against. And acts of war are generally not covered by most insurance. Financial events like the mortgage crisis don't cause insurance losses.

Second, insurers (and reinsurers) cede (sell off) some of their risk because they want to service their clients but don't have the capacity in terms of regulatory capital. So they sell the insurance and then sell of the risks. Reinsurers do the same thing. And we have more than a hundred years of data on insurance losses, more than on stocks. So that argument about not knowing what losses are likely to be and what returns are likely to be IMO doesn't hold. And as I mentioned 2005 was a really bad year for reinsurers with if memory serves three big events that caused large losses. That resulted in about 15% loss.

As to this being complex, actually it is very simple and intuitive investment. We should all want to be on the other side of the very product none of us likes to buy because we are likely transferring profits to the insurer (because we don't want to accept the risk of a low probability but costly event).

Buffett himself not only owns a reinsurer, but despite the comments made above (he often talks his book) he continues to invest more and more in the business and LOVES it.

The reason for the high expected return without the same type of equity risk is you are being paid for two risks, one is illiquidity (which if you don't need it for at least some portion of your portfolio is a free lunch, or close to it) and the other is negative skewness and kurtosis (which people dislike, preferring, irrationally from economic perspective, positive skewness like lottery tickets). Remember by broadly diversifying the risks across many different types of risks (as I mentioned) and doing so globally, you GREATLY reduce tail risk for the total book. As I said, the worst year we identified would be losses of about 15%, a small fraction of what the worst losses are to stocks. So even if we double that to 30% it would still be only 50-60% of the worst losses for equities and with NO CORRELATION to stocks, so greatly improves Sharpe ratio of a portfolio. That's why Buffett loves the business.

Junior, There is really NOTHING exotic about this product at all. It's very straightforward and simple to understand. So I don't know what you think is complex or exotic.

Hopefully that helps. To me this may be the best new product in decades from a portfolio perspective.
Larry

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by wije » Thu Apr 06, 2017 9:23 pm

Larry, how would you rank-order SRRIX, LENDX, and QSPIX, and why? Any other good alt-funds I missed?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by dave_k » Fri Apr 07, 2017 4:30 pm

Larry, you mentioned there's a long history for reinsurance, and that there was a roughly 15% loss in 2005. Can you point us to a data source where we can see what the returns on a reinsurance portfolio like SRRIX would have been over a longer time-frame than just the few years it has been around? I'm interested to see how it would have recovered from losses like those in 2005, and others. For example, after 2005, would it have "climbed back" at a higher rate to average about 7-8% (after fees) over a period of time including 2005, or would it have been a more "permanent" 15% loss, with gains after that just going back to typical?

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Re: Alts:new sources of risk/return improve portfolio efficiency

Post by larryswedroe » Fri Apr 07, 2017 7:11 pm

wije
Now this is very personal choice but I would rank them right now LENDX, SRRIX and QSPRX and that is the order in which my allocations are in terms of weighting. In fact I think LENDX is "too good to be true" and that will result in huge flows and pull spreads down some over time. Now the market is huge, in trillions, so it might take long time or might not ever happen.

Dave, sorry no public available data that I am aware of. But I'm sure you can look at the stocks of reinsurers and see their profits. And the expected return incorporates the likelihood of occassional large losses like -15%
Larry

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