Reality check: why would anyone buy a Stone Ridge Longevity fund?

[nisiprius]

I stumbled across it because some Stone Ridge interval funds have been discussed often enough in the forum that I like to get some idea of how they have actually performed. So I spotted a new fund, or forty-two new funds, they recently introduced. Rough description here

Just a reality check. Am I missing something obvious?

In the case of a 65-year-old woman, the Longevity Risk Premium Fixed Income Fund 2045 65F is priced at $20.98 per share and has a "Fund Liquidation Date" 25 years from now.

Until the earlier of the Fund Liquidation Date or the last scheduled distribution date on which the Fund has assets to distribute, the Fund intends to make a distribution each month equal to $0.0833 per outstanding share of the Fund, for a total of $1.00 per share per year.

So for $20.98 she gets a total payout of $25. If she dies in less than 25 years, she might have received a total of more or less than $20.98 in payments. If it was more she gets "cancellation on death," the payments simply end. If it was less, she gets a final "mandatory redemption" payment that brings your total up to $20.98. So it is like a "return of premium" or "cash refund" annuity.

So for, say, $209,800 she gets $10000/year for 25 years, with "return of initial purchase price" if she dies earlier.

A vehicle that explicitly warns of

Risk that the Fund Will Run Out of Assets Prior to the Fund Liquidation Date.

in which case, too bad, that's a risk you choose to take, and

Distributions provided by the Fund are not guaranteed or otherwise backed by an insurance company or by any third party. Therefore, if the Fund is wrong in its assumptions or actuarial estimates or the Fund’s investments lose money, then at any time, you may not receive monthly distributions as described below, and you may lose any or all of your investment that has not already been distributed to you.

For a quick estimate, I looked at a Social Security life table. According to this table, a 65-year-old woman has a chance of 29,503/87,855 = 34% of living more than 25 years and thus outliving the fund. The population that buys annuities is longer-lived than that, but, at any rate, 25 years isn't even close to being income for life.

According to immediateannuities.com--and their web illustrations have been decent approximations to real annuities you can actually buy from them--




--for $209,800 a 65-year-old woman can buy an annuity that provides payments of $910/month = $10,920/year, not $10,000. She will get those payments for life, not just 25 years, so she has a 34% chance of getting payments for longer than with the Stone Ridge Fund. Like the Stone Ridge fund, there is a guarantee she will at least get her initial payment back. And it's insurance, and so if the actuaries screwed up that's the insurer's problem, they still need to pay what they contracted to pay.

Why is the Stone Ridge fund interesting?

[Watty]

Some things are sold, not bought.

[nisiprius]

It doesn't work for an 85-year-old male, either. The Stone Ridge fund costs $12.81 per dollar of income per year, so $121,810 for $10,000 per year. The ImmediateAnnuities quotation for "life with cash refund" for a $121,810 premium and "cash refund" is $946/month = $11,352, so, again, the insurance product pays considerably more per month, for an insurance contract that contractually guarantees the payments and is backstopped by the state guaranty association.

In this case, life expectancy is only 6.95 years so the likelihood is that the fund owner will die before the cumulative payouts reach the initial payment, so the annuity probably does not pay out for any longer.

[Broken Man 1999]

Perhaps due to the restrictive buying opportunities, the people buying feel special, that is "Not everyone can purchase this, but I can!"

Remember, Bernie Madoff wouldn't let just anyone sign up to be swindled, and those who were able to do so probably felt special... for a little time!

Broken Man 1999

[Stinky]

I don't understand what the allure is in this fund. I'm a (former) insurance person, and I don't get it.

I skimmed through the prospectus, and it appears that New York Life's fingers are all over this. A subsidiary of NYL provides actuarial services for the fund. Ted Mathis, CEO of NYL, sits on the three-person "Board of Advisors".

On the one hand, if New York Life (a respected, blue chip company) is involved with this, it's probably not an absolute scam. On the other hand, I don't understand why NYL would get involved with a shady-looking fund that could be perceived to be in competition with the annuities that it sells.

What gives?

[cheezit]

The only thing I can think of is that there is some (limited) liquidity with these funds that isn't there with an annuity. Eg. you can sell your shares (at a reduced price) 10 years in with these funds, whereas you couldn't "cash out" of an SPIA:

Optional Early Share Repurchases. To provide liquidity to shareholders, the Fund will offer, on a quarterly basis, to
repurchase up to 100% of the shares. The Fund currently anticipates the repurchase offers will occur in February, May,
August and November, with payment being made on the third (3rd) business day of the following month. The repurchase
price is determined by a formula described under “Early Repurchases” below, but will be less than NAV, and potentially
substantially less than NAV, and will be less than the redemption price that would be payable upon a shareholder’s death.
Shareholders may contact Stone Ridge Securities LLC (the “Distributor”) at any time for the current repurchase price.
Shareholders may log in to the website maintained by the Distributor, www.flourish.com (or, if they purchased their shares
through a selling agent, by contacting the selling agent), on any business day to obtain the current repurchase price. See
“Early Repurchases” below for more details, including how a shareholder can submit a repurchase request for their shares.
Additionally, as determined by the formula, once the total amount of distributions per share equals or
exceeds the Initial Purchase Price for the Fund, the repurchase price will be zero. At this point, shareholders
tendering their shares will receive no value. The Fund expects to reach this point in September, 2040.


Limited Liquidity. The only liquidity investors in the Fund can expect is from the planned distributions, the mandatory
redemptions upon death, the repurchase offers and upon liquidation of the Fund. An investment in the Fund is suitable
only for long-term investors who can bear the risks associated with the limited liquidity of the shares. Investors should
consider their investment goals, time horizons and risk tolerance before investing in the Fund. The Fund’s shares are not
listed, and the Fund does not intend to list the shares for trading, on any national securities exchange.

I don't know how many people are going to think that's worth both the added risk and the reduced payout ratio, but there it is.

[nisiprius]

Is this a COVID-19 play? They warn you that the fund, and its shareholders could get in big trouble if the actuaries are too pessimistic and everyone lives longer than the actuaries expect.

Maybe the appeal is the possibility that mortality is much higher than the actuaries expect. The fantasy is that most of the other shareholders die of COVID-19 and only get their money back, but that you, lucky you, win the COVID-19 gamble, live long and prosper, and lo and behold when the fund reaches the Fund Liquidation Date there is lots of money left over from those who died and you make out like a bandit. Maybe that is the "longevity risk premium" they are talking about?

[marcopolo]

Some things are sold, not bought.

Exactly.

I am sure many people will buy these simply because their "advisor" recommended them.

[Northern Flicker]

I don't understand what the allure is in this fund. I'm a (former) insurance person, and I don't get it.

I skimmed through the prospectus, and it appears that New York Life's fingers are all over this. A subsidiary of NYL provides actuarial services for the fund. Ted Mathis, CEO of NYL, sits on the three-person "Board of Advisors".

On the one hand, if New York Life (a respected, blue chip company) is involved with this, it's probably not an absolute scam. On the other hand, I don't understand why NYL would get involved with a shady-looking fund that could be perceived to be in competition with the annuities that it sells.

What gives?

At least they are engaging with an actuarial service (what is being provided by NY Life) to value the " risk premium", which is more than I can say appears to be the case for their reinsurance fund. And the fact that former insurance executives run the reinsurance fund is not a substitute for an actuarial valuation.

If the longevity risk premium fund is actually capturing longevity risk fairly, then the 1% load and 0.6% ER is cheaper than the typical sales commission and administrative cost of a SPIA or DIA/longevity annuity.

[nisiprius]

I don't understand what the allure is in this fund. I'm a (former) insurance person, and I don't get it.

I skimmed through the prospectus, and it appears that New York Life's fingers are all over this. A subsidiary of NYL provides actuarial services for the fund. Ted Mathis, CEO of NYL, sits on the three-person "Board of Advisors".

On the one hand, if New York Life (a respected, blue chip company) is involved with this, it's probably not an absolute scam. On the other hand, I don't understand why NYL would get involved with a shady-looking fund that could be perceived to be in competition with the annuities that it sells.

What gives?

At least they are engaging with an actuarial service (what is being provided by NY Life) to value the " risk premium", which is more than I can say appears to be the case for their reinsurance fund. And the fact that former insurance executives run the reinsurance fund is not a substitute for an actuarial valuation.

If the longevity risk premium fund is actually capturing longevity risk fairly, then the 1% load and 0.6% ER is cheaper than the typical sales commission and administrative cost of a SPIA or DIA/longevity annuity.

But I already pointed out that the payouts from product are considerably lower than the payouts from an ordinary insurance-company SPIA, and the insurance company product pays out for life while the Stone Ridge fund ends at 25 years. If there are cost savings, the customers aren't seeing them.

[Broken Man 1999]

Not a scam, just an expansive product.

People buy things all the time that are not a good use of their money. This one really stinks, though.

Education can be expensive. This product has very high tuition.

Broken Man 1999

[Northern Flicker]

I don't understand what the allure is in this fund. I'm a (former) insurance person, and I don't get it.

I skimmed through the prospectus, and it appears that New York Life's fingers are all over this. A subsidiary of NYL provides actuarial services for the fund. Ted Mathis, CEO of NYL, sits on the three-person "Board of Advisors".

On the one hand, if New York Life (a respected, blue chip company) is involved with this, it's probably not an absolute scam. On the other hand, I don't understand why NYL would get involved with a shady-looking fund that could be perceived to be in competition with the annuities that it sells.

What gives?

At least they are engaging with an actuarial service (what is being provided by NY Life) to value the " risk premium", which is more than I can say appears to be the case for their reinsurance fund. And the fact that former insurance executives run the reinsurance fund is not a substitute for an actuarial valuation.

If the longevity risk premium fund is actually capturing longevity risk fairly, then the 1% load and 0.6% ER is cheaper than the typical sales commission and administrative cost of a SPIA or DIA/longevity annuity.

But I already pointed out that the payouts from product are considerably lower than the payouts from an ordinary insurance-company SPIA, and the insurance company product pays out for life while the Stone Ridge fund ends at 25 years. If there are cost savings, the customers aren't seeing them.

Sorry, the annuity quote screenshot in your post subliminally looked like an ad and I automatically skipped over it. Yeah, this looks like another opaque Stoneridge product designed to enhance the wealth of Stoneridge.

[firebirdparts]

Sounds like a coffee can buried in the yard wouldn't be too terribly inferior to this fund.

[Alchemist]

I am not sure why anyone would buy a Stone Ridge fund at all. They have continuously failed to achieve the advertised objectives while charging enormous fees. Same for AQR.

[Elysium]

Why is the Stone Ridge fund interesting?

It's quite simple, they are designed for advisors who have a relationship with Stoneridge to push them on to clients. They have a profit sharing agreement, that's how both parties can keep the revenue coming,

[nisiprius]

Sorry, the annuity quote screenshot in your post subliminally looked like an ad and I automatically skipped over it. Yeah, this looks like another opaque Stoneridge product designed to enhance the wealth of Stoneridge.

It's an ad. I've never used incomeannuities.com and have no connection with them, but I once did ask them to send me information and was impressed with quantity and the high information density of what they sent. I'm trying to remember what you need to do to get actual quotations instead of that "estimate"--I think you need to give them contact information and say "but don't contact me"--but the real-world quotations match up well with that screen. It isn't a teaser deal. Until recently I could have used Vanguard's website's access to Income Solutions to get actual quotes, but Vanguard seems to have discontinued that relationship.

[nisiprius]

I am not sure why anyone would buy a Stone Ridge fund at all. They have continuously failed to achieve the advertised objectives while charging enormous fees. Same for AQR.

Oh, sure. But a formerly frequent poster in the forum--a knowledgable poster who knows a lot more than I do--was talking up the virtues of putting a portion of your portfolio into a four-way equal split between AQR's QSPIX, and Stone Ridge's AVRPX, LENDX, and SSRIX, so much and so consistently, that I keep trying to check in and see what's been happening.

[Horton]

Oh, sure. But a formerly frequent poster in the forum--a knowledgable poster who knows a lot more than I do--was talking up the virtues of putting a portion of your portfolio into a four-way equal split between AQR's QSPIX, and Stone Ridge's AVRPX, LENDX, and SSRIX, so much and so consistently, that I keep trying to check in and see what's been happening.

Perhaps he will return to help us understand this fund?

[Elysium]

I am not sure why anyone would buy a Stone Ridge fund at all. They have continuously failed to achieve the advertised objectives while charging enormous fees. Same for AQR.

Oh, sure. But a formerly frequent poster in the forum--a knowledgable poster who knows a lot more than I do--was talking up the virtues of putting a portion of your portfolio into a four-way equal split between AQR's QSPIX, and Stone Ridge's AVRPX, LENDX, and SSRIX, so much and so consistently, that I keep trying to check in and see what's been happening.

Perhaps you are giving too much credit to this poster? It is possible to have terrible judgement while having good knowledge of concepts, it is even possible one can acquire the wrong knowledge even while operating with high levels of cerebral capacity when clouded by poor judgement.

[Alchemist]

I am not sure why anyone would buy a Stone Ridge fund at all. They have continuously failed to achieve the advertised objectives while charging enormous fees. Same for AQR.

Oh, sure. But a formerly frequent poster in the forum--a knowledgable poster who knows a lot more than I do--was talking up the virtues of putting a portion of your portfolio into a four-way equal split between AQR's QSPIX, and Stone Ridge's AVRPX, LENDX, and SSRIX, so much and so consistently, that I keep trying to check in and see what's been happening.

Well aware of that particular poster and his promotion (and weird hand waiving of ER's) of Alt Funds. I would be curious to see his comments now especially in light of his other recommendations like SCV similarly not performing as advertised.

I appreciate you taking the time to post updates on these Alt Funds. Hopefully it will prevent future bogleheads from buying this snake oil.

[Northern Flicker]

Consider SSRIX. The ER IS 2.31%. You will pay an AUM fee to an advisor for your total portfolio if you want an allocation to SSRIX to be part of it, so if your portfolio includes CDs or muni bonds, the AUM fee will apply to them as well.

But my favorite part is the liquidity constraint. It is presented that you can only withdraw funds quarterly, hence the name interval fund. But that is not guaranteed-- it is subject to approval by the Stoneridge board. From the prospectus:

Interval Fund. The Fund has an interval fund structure pursuant to which the Fund, subject to applicable law, conducts quarterly repurchase offers for Shares at net asset value (“NAV”), subject to approval of the Board of Trustees (the “Board” and each of the trustees on the Board, a “Trustee”). It is also possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased. There is no assurance that you will be able to tender your Shares when or in the amount that you desire. The Fund’s Shares are not listed, and the Fund does not currently intend to list its Shares for trading, on any national securities exchange. There is not expected to be any secondary trading market in the Shares. Even though the Fund makes quarterly repurchase offers to repurchase a portion of the Shares to try to provide liquidity to shareholders, you should consider the Shares to be illiquid.

[Random Musings]

I would pass. Would not want to have my hard earned dollars dragged down by the Stone.

RM

[afan]

This is a gag.
Make up the most absurd fund one can imagine and see who laughs.

[nisiprius]

...But my favorite part is the liquidity constraint. It is presented that you can only withdraw funds quarterly, hence the name interval fund. But that is not guaranteed-- it is subject to approval by the Stoneridge board...

And that is not some idle lawyers-made-us-do-it technicality. It has, apparently, happened twice in the history of SRRIX. People wanted to get out, waited until the quarterly "repurchase offer," but were only allowed to sell a small percentage of their shares.

I don't understand the regulations, but I deduce that these funds must not be required to make the same kind of public disclosures as mutual funds (such as hypothetical growth of $10,000). I said that SRRIX has "apparently" denied repurchasing twice, but I say "apparently" because details like SRRIX "gating" cannot be found, or at least I wasn't able to find them, on the Stone Ridge website or in web searches.

I think many investors do not sufficiently appreciate the merits of mutual funds and ETFs, with their wealth of disclosures and their daily liquidity. If you spend fifteen minutes trying to dig out data from, say, the AQR website (mutual funds) and Stone Ridge (interval funds), the difference is breathtaking. AQR even gives you a one-click spreadsheet download of the monthly total returns of its funds. The Stone Ridge website has nothing beyond the legally required prospectuses and annual reports.

The lack of a secondary market means that no true market value is available in between repurchase offers, and I still haven't found any website that charts total return of these funds (i.e. including what was paid out to clients who took advantage of quarterly repurchase offers). The available charts seem to be price only, they show precipitous quarterly drops, and the chart data does not match up with reported annual returns in their prospectus. And the reporting intervals for their various funds don't match, the annual returns for LENDX are February to February, others are October to October. This makes it impossible for an outsider to backtest claims that e.g. a portfolio of 25% each QSPIX, AVRPX, LENDX, and SRRIX is expected to have similar return as equities with half the volatility. "Volatility" is a very sticky question if you do not have a secondary market and a public market value for a fund. And you cannot even determine annual volatility for a portfolio if the annual returns are reported on different fiscal years. Perhaps a determined search would at least find quarterly returns for these funds?

[Northern Flicker]

Yes, Larry Swedroe & Jared Fizer make that point in their book "The Only Guide to Alternative Investments You'll Ever Need" on pages 108-109:

Thus, illiquidity and the resulting autocorrelation lead to an underestimation of volatility and the real risks of an asset class. The result is that for portfolios of illiquid securities, reported returns will tend to be smoother than true economic returns, thus underestimating volatility and overstating risk-adjusted performance measures, such as the Sharpe ratio.

Another point is that I am quite skeptical that the reinsurers who sell slices of their reinsurance portfolios to SSRIX are going to underwrite the liquidity risk by providing a discount. That would seem to cause the residual portfolio they retain to be underfunded actuarially. What is the mechanism for discounting in a risk premium for the liquidity risk of SSRIX? Are investors being compensated for the liquidity risk, which clearly is very high?

[FrugalInvestor]

Some things are sold, not bought.

And some people either don't bother to or don't know how to research, evaluate and compare financial "products."

[afan]

Unfortunately, some people hire others to make those decisions for them. That is how they end up with things like PCRIX, QSPIX and these interval funds.

[Northern Flicker]

Liquidity risk usually has a moderately high correlation with equity risk. We saw that with catastrophe bonds in 2008/2009. Despite their fundamentals being based on a very different source of risk than equities, the market for them dried up as insurance companies were delevering. I think they were down about 40% during that period.

[Northern Flicker]

Here is some info on cat bonds in 2008/2009 and at other times. Unlike shares of SSRIX, there is a secondary market for cat bonds. I had estimated a drop of around 40% from the widening spreads, but they are fairly low duration due to some floating rate terms, so the drop was in fact lower.

From: https://partnerre.com/wp-content/upload ... ricing.pdf

2008–2009: The housing market bust and financial crisis altered this relationship for the first time. The financial market stress was so
great that it caused a liquidity crunch across all markets as investors liquidated any assets they could to meet financing and margin call requirements. This led to significant repricing of risk (increase in risk premium) across all asset classes, even those like catastrophe bonds that were not directly impacted by the crisis. Both catastrophe and high-yield corporate bonds spreads widened significantly. The rise in catastrophe bond spreads occurred with a slight time delay and the increase was not as pronounced. In general the catastrophe bond market demonstrated a remarkable liquidity and relative price stability (compared to other asset classes). This may have been due
to the fact that a significant portion of catastrophe bonds was held by “ILS only” funds which did not face the level of liquidity calls other funds endured.
Traditional reinsurance rates increased slightly in 2009, but not to the same extent as widening of catastrophe bond spreads. Towards the end of 2009 and beginning
of 2010, as the crisis was coming to an end, spreads for both catastrophe and high-yield corporate bonds began to tighten. Reinsurance rates also declined.
This period showed the first evidence that the market for catastrophe bonds was not as decoupled from the broader financial market as previously perceived. The fact that it took a financial event of the scale of the Great Recession (generally considered to be the largest economic downturn
since the Great Depression) to trigger this correlation, simply highlights the excellent diversification catastrophe bonds can provide in a portfolio.

[wickywack]

This makes it impossible for an outsider to backtest claims that e.g. a portfolio of 25% each QSPIX, AVRPX, LENDX, and SRRIX is expected to have similar return as equities with half the volatility.

FWIW, that claim is on QSPIX alone:

The expectation is that the fund will produce equity-like returns, but with about half the volatility of the market.

I assume a combination of similar, but uncorrelated funds would lower volatility further.

[moviebuff]

Does anyone know if this product is already launched and available?

It is very difficult to see how much assets they have. They need to hit at least 250 investors per age group to be statistically sound and I find it difficult if they have been able to do that for any age groups.

There are no media/articles about the product and I'm trying to understand how Stone Ridge distributes its products.

Thanks