Stone Ridge High Yield Reinsurance Risk Premium Fund
PROSPECTUS
STONE RIDGE ASSET MANAGEMENT LLC
A
FUND FOR LONG-TERM INVESTORS SEEKING TO INVEST IN
REINSURANCE-RELATED SECURITIES:
STONE RIDGE HIGH YIELD REINSURANCE RISK PREMIUM FUND
|
|
|
|
|
| |
|
|
Share
Class |
|
Ticker
Symbol |
|
|
| |
Class I |
|
SHRIX |
|
|
| |
Class M |
|
SHRMX |
|
|
This
prospectus describes Class I shares and Class M shares of the
above-listed fund (the “Fund”). The Fund is generally sold to
(i) institutional investors, including registered investment advisers
(RIAs), that meet certain qualifications and have completed an educational
program provided by Stone Ridge Asset Management LLC, the Fund’s investment
adviser; (ii) clients of such institutional investors; and
(iii) certain other Eligible Investors (as defined in “Eligibility to Buy
Class I Shares and Class M Shares” below). The Fund does not charge
sales commissions or loads.
Neither the Securities and Exchange Commission (the
“Commission”) nor any state securities commission has approved or disapproved of
these securities or determined this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
This
prospectus contains important information about the Fund and the services
available to shareholders. Please save it for reference.
STONE
RIDGE TRUST
TABLE
OF CONTENTS
|
|
|
| |
|
|
Page |
|
| |
|
|
|
S‑1 |
|
| |
|
|
|
S‑1 |
|
| |
|
|
|
1 |
|
| |
|
|
|
1 |
|
|
|
|
7 |
|
|
|
|
7 |
|
|
|
|
21 |
|
| |
|
|
|
21 |
|
| |
|
|
|
21 |
|
|
|
|
21 |
|
|
|
|
22 |
|
|
|
|
22 |
|
| |
|
|
|
22 |
|
| |
|
|
|
22 |
|
|
|
|
23 |
|
| |
|
|
|
25 |
|
| |
|
|
|
25 |
|
|
|
|
25 |
|
|
|
|
25 |
|
| |
|
|
|
26 |
|
| |
|
|
|
26 |
|
|
|
|
27 |
|
| |
|
|
|
28 |
|
| |
|
|
|
28 |
|
|
|
|
29 |
|
|
|
|
29 |
|
|
|
|
31 |
|
| |
|
|
|
32 |
|
| |
|
|
|
34 |
|
| |
|
|
|
36 |
|
| |
|
|
|
Back Cover |
|
FUND
SUMMARY
Stone Ridge High Yield Reinsurance Risk Premium Fund
Investment
Objective
The
Stone Ridge High Yield Reinsurance Risk Premium Fund’s (the “Fund”) investment
objective is to seek a high level of total return consisting of income and
preservation of capital. There can be no assurance that the Fund will achieve
its investment objective.
Fees
and Expenses
The
table below describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund. You may pay other fees, such as brokerage
commissions and other fees to financial intermediaries, which are not reflected
in the table and example below.
|
|
| |
|
|
| |
|
Annual Fund
Operating Expenses |
|
Class I |
|
|
Class M |
|
(expenses you pay each year
as a percentage of the value of your
investment) |
|
|
|
| |
|
| |
|
| |
Management Fees |
|
|
1.50% |
|
|
|
1.50% |
|
|
| |
Distribution and/or Service (12b‑1)
Fees |
|
|
None |
|
|
|
0.15% |
|
Other Expenses |
|
|
|
| |
|
| |
Interest
Payments on Borrowed Funds |
|
|
0.04% |
|
|
|
0.04% |
|
Recoupment(1) |
|
|
0.01% |
|
|
|
0.01% |
|
Remainder
of Other Expenses |
|
|
0.21% |
|
|
|
0.21% |
|
| |
|
|
|
|
|
|
|
|
| |
Total Other Expenses |
|
|
0.26% |
|
|
|
0.26% |
|
| |
|
|
|
|
|
|
|
|
| |
Total Annual Fund Operating
Expenses |
|
|
1.76% |
|
|
|
1.91% |
|
|
| |
(Fee Waiver and/or Expense
Reimbursement)(1) |
|
|
(0.02)% |
|
|
|
(0.02)% |
|
| |
|
|
|
|
|
|
|
|
| |
Total Annual Fund Operating Expenses
After (Fee Waiver/Expense Reimbursement) |
|
|
1.74% |
|
|
|
1.89% |
|
| |
|
|
|
|
|
|
|
(1) |
Through
February 28, 2025, the
Adviser (defined below) has contractually agreed to waive its management
fee and/or pay or otherwise bear operating and other expenses of the Fund
or a Class thereof (including offering expenses, but excluding
brokerage and transactional expenses, borrowing and other
investment-related costs and fees including interest and commitment fees,
short dividend expense, acquired fund fees and expenses, taxes, litigation
and indemnification expenses, judgments and extraordinary expenses not
incurred in the ordinary course of the Fund’s business (collectively, the
“Excluded Expenses”)) solely to the extent necessary to limit the Total
Annual Fund Operating Expenses, other than Excluded Expenses, of the
applicable Class to 1.70% for Class I shares and 1.85% for
Class M shares of the average daily net assets attributable to such
Class of shares of the Fund. The Adviser shall be entitled to recoup
in later periods expenses attributable to a Class that the Adviser
has paid or otherwise borne (whether through reduction of its management
fee or otherwise) to the extent that the expenses for the Class of
shares (including offering expenses, but excluding Excluded Expenses)
after such recoupment do not exceed the lower of (i) the annual
expense limitation rate in effect at the time of the actual
waiver/reimbursement and (ii) the annual expense limitation rate in
effect at the time of the recoupment; provided that the Adviser shall not be
permitted to recoup any such fees or expenses beyond three years from the
end of the month in which such fee was reduced or such expense was
reimbursed. The expense limitation agreement may only be modified by a
majority vote of the trustees who are not “interested persons” of the Fund
(as defined by the Investment Company Act of 1940, as amended (the “1940
Act”)) and the consent of the Adviser.
|
Example. This Example is intended to help you compare the costs of
investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated, regardless of whether or not you redeem your shares at the end of
such periods. The Example also assumes that your investment has a 5% return each
year and that the Fund’s operating expenses (as described above) remain the same
and takes into account the effect of the expense reimbursement (if any) during
the first year. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
1 Year |
|
3 Years |
|
5 Years |
|
10 Years |
Class I Shares |
|
|
$ |
177 |
| |
|
$ |
552 |
| |
|
$ |
952 |
| |
|
$ |
2,071 |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Class M Shares |
|
|
$ |
192 |
| |
|
$ |
598 |
| |
|
$ |
1,030 |
| |
|
$ |
2,231 |
|
S-1
Portfolio
Turnover
The
Fund generally does not pay transaction costs, such as commissions, when it buys
and sells event-linked bonds. However, the prices of event-linked bonds
purchased by the Fund reflect a “bid‑ask spread” instead of explicit transaction
costs. In addition, with respect to certain trades in event-linked bonds and
other investments, the Fund may pay transaction costs, such as commissions, when
it buys and sells such investments (or “turns over” its portfolio). A higher
portfolio turnover rate may indicate higher transaction costs and may result in
higher taxes when Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the Example, affect
the Fund’s performance. For the fiscal year ended October 31, 2023, the
Fund’s portfolio turnover rate was 31.98% of the average value of its portfolio.
Portfolio turnover will not be a limiting factor should the Adviser deem it
advisable to purchase or sell securities.
Principal
Investment Strategies
Stone
Ridge Asset Management LLC (“Stone Ridge” or the “Adviser”) believes that
investing in reinsurance-related securities should involve a long-term view and
a systematic focus on sources of expected return, not on security selection or
market timing. In constructing an investment portfolio, the Adviser identifies a
universe of eligible securities with well-defined risk and return
characteristics. It then seeks to obtain broad investment exposure to a
meaningful subset of that universe while efficiently managing the portfolio and
keeping trading costs low. Because the risks in reinsurance-related securities —
largely related to natural or non‑natural disasters, such as earthquakes or
plane crashes — are not similar to the risks investors bear in traditional
equities and debt markets, the Adviser believes that investment in
reinsurance-related securities may provide benefits when added to traditional
portfolios. As such, the Adviser does not intend to buy or sell securities for
the portfolio based on prospects for the economy or based on movements of
traditional equities and debt securities markets.
The
Fund pursues its investment objective by investing primarily in
reinsurance-related securities, including event-linked bonds, shares or notes
issued in connection with quota shares (“Quota Share Notes”) and, to a lesser
extent, shares or notes issued in connection with industry loss warranties (“ILW
Notes”), event-linked swaps, and equity securities (publicly or privately
offered) or the derivatives of equity securities of companies in the reinsurance
and insurance industry (collectively, “reinsurance-related securities”). Under
normal circumstances, the Fund will invest at least 80% of its net assets, plus
the amount of any borrowings for investment purposes, in reinsurance-related
securities. In addition, the Fund will also invest at least 80% of its net
assets, plus the amount of any borrowings for investment purposes, in high
yield, high risk debt securities (commonly referred to as “junk bonds”).
Reinsurance-related
securities typically are “high-yield.” High yield securities typically are of
below-investment-grade quality, and may either have below-investment-grade
credit ratings, which ratings are associated with securities having high risk,
speculative characteristics, or may be unrated but of comparable quality to
securities with below-investment-grade credit ratings. The Adviser has broad
discretion to allocate the Fund’s assets among these investment categories. As
of December 31, 2023, the median spread above collateral of event-linked
bonds was approximately 6.25%, although this may change due to the variable
nature of the event-linked bond yields and/or other market circumstances.
Consistent with its investment objective and its 80% policies, the Fund may
invest in reinsurance-related securities across the yield spectrum, but will
generally focus its investments in higher yielding, higher risk securities
(i.e., those above the median yield). The Fund has no limit as to the maturity
of the securities in which it invests or as to the market capitalization of the
issuer.
Event-linked
bonds are variable rate debt securities for which the return of principal and
payment of interest are contingent on the non‑occurrence of a specified trigger
event(s) that leads to economic and/or human loss, such as an earthquake of a
particular magnitude or a hurricane of a specific category. The most common type
of event-linked bonds is known as “catastrophe” or “CAT” bonds. The Fund may
invest in event-linked bonds in one or more of three ways: the Fund may purchase
event-linked bonds when initially offered; the Fund may purchase event-linked
bonds in the secondary, over‑the‑counter (“OTC”) market; or the Fund may gain
indirect exposure
S-2
to
event-linked bonds using derivatives. The Fund may pursue other types of
event-linked derivative strategies using derivative instruments that are
typically contingent, or formulaically related to defined trigger events.
Trigger
events may include hurricanes, earthquakes and weather-related phenomena,
pandemics, epidemics, non‑natural catastrophes, such as plane crashes, or other
events resulting in a specified level of physical or economic loss, such as
mortality or longevity.
The
Fund may invest in both longevity bonds and mortality bonds, which are
fixed-income securities, typically issued by special purpose vehicles.
The
Fund may also seek to gain exposure to reinsurance contracts by holding notes or
preferred shares issued by a special purpose vehicle (“SPV”) whose performance
is tied to underlying reinsurance transaction(s), including Quota Share Notes
and ILW Notes. The Fund, as holder of a note or preferred share issued by the
SPV, would be entitled to participate in the underwriting results and investment
earnings associated with the SPV’s underlying reinsurance contracts.
Investments
in Quota Share Notes provide exposure to a form of proportional reinsurance in
which an investor participates in the premiums and losses of a reinsurer’s
portfolio according to a pre‑defined percentage. For example, under a 20%
quota-share agreement, the SPV would obtain 20% of all premiums of the subject
portfolio while being responsible for 20% of all claims, and the Fund, as holder
of a Quota Share Note issued by the SPV, would be entitled to its pro rata share
of the premiums received by the SPV and would be responsible for its pro rata
share of the claims, up to the total amount invested. The Fund will generally
seek to gain exposure to geographically diversified natural catastrophe Quota
Share Notes and the Quota Share Notes in which the Fund invests will typically
be high yield, high risk instruments.
Investments
in ILW Notes provide exposure to a transaction through which one party
(typically, an insurance company or reinsurance company, or a
reinsurance-related asset manager) purchases protection based on the total loss
arising from a catastrophic event to the entire insurance industry rather than
the losses of any particular insurer. For example, the buyer of a
“$100 million limit US Wind ILW attaching at $20 billion” will pay an
upfront premium to a protection writer (i.e., the reinsurer or an SPV) and in
return will receive $100 million if total losses to the insurance industry
from a single US hurricane exceed $20 billion. The industry loss
($20 billion in this case) is often referred to as the “trigger” and is
reported by an independent third party after an event has occurred. The amount
of protection offered by the contract ($100 million in this case) is
referred to as the “limit.” ILW Notes could also provide exposure to
transactions linked to an index not linked to insurance industry losses, such as
wind speed or earthquake magnitude and location. The Fund, as holder of an ILW
Note, would be entitled to a return linked to the premium paid by the sponsor
and the occurrence or non‑occurrence of the trigger event.
The
Fund invests at least 80% of its net assets, plus the amount of any borrowings
for investment purposes, in below-investment-grade securities (“junk bonds”)
(i.e., those rated below Baa3 by Moody’s Investors Service, Inc. and lower than
BBB‑by S&P Global Ratings). Because most event-linked bonds, Quota Share
Notes and ILW Notes are unrated, a substantial portion of the Fund’s assets will
typically be invested in unrated securities determined by the Adviser to be of
comparable quality to below-investment-grade securities, similar in some
respects to high yield corporate bonds. Event-linked catastrophe bonds, Quota
Share Notes and ILW Notes are exposed to catastrophic insurance risk whereas
high yield bonds are typically exposed to the potential default of financially
distressed issuers. The Fund has no limit as to the maturity of the securities
in which it invests or as to the market capitalization of the issuer. The Fund
may invest in event-linked bonds, Quota Share Notes, ILW Notes and debt
securities of any credit rating, including those rated below investment grade
or, if unrated, determined by the Adviser to be of comparable quality. With
respect to event-linked bonds, the rating, if any, primarily reflects the rating
agency’s calculated probability that a pre‑defined trigger event(s) will occur,
as well as the overall expected loss to the bond principal. In addition to
ratings issued by rating agencies, event-linked bonds are generally issued with
an attachment probability and expected loss percentage determined by an
independent modeler (a “risk model”). A risk model is created based on
historical data and averages as well as
S-3
scientific
and probabilistic analysis and is used to inform investors and others on the
potential impact of a wide variety of catastrophic events or other specified
events that result in physical and/or economic loss. The Adviser, in selecting
investments for the Fund, will generally consider risk models created by
independent third parties, the sponsor of a reinsurance-related security or a
broker. The Adviser may also consider its own risk models based on comparable
prior transactions, quantitative analysis, and industry knowledge.
In
implementing the Fund’s investment strategy, Stone Ridge will seek to invest in
reinsurance-related securities tied to a varied group of available perils and
geographic regions. Further, within each region and peril, Stone Ridge seeks to
hold a balance of exposures to underlying insurance and reinsurance carriers,
trigger types, and lines of business. The Adviser will continue to monitor the
risk of the Fund’s investments on a regular basis. Because the majority of
reinsurance-related security issuers are domiciled outside the United States,
the Fund will normally invest significant amounts of its assets in foreign
(non‑U.S.) entities.
The
Fund retains the flexibility to invest in other instruments as the Adviser may
consider appropriate from time to time, including registered investment
companies, U.S. government securities, cash and cash equivalents. The Fund may
also enter into other types of investments that enable the Fund to provide risk
transfer services, as the Adviser may consider appropriate from time to time.
Borrowing
and Leverage
The
Fund may obtain leverage through borrowings in seeking to achieve its investment
objective. The Fund’s borrowings, which would typically be in the form of loans
from banks, may be on a secured or unsecured basis and at fixed or variable
rates of interest. In addition, the Fund enters into reverse repurchase
agreements pursuant to which the Fund transfers securities to a counterparty in
return for cash and agrees to repurchase the securities at a later date and for
a higher price. Reverse repurchase agreements are treated as borrowings by the
Fund, are a form of leverage and may make the value of an investment in the Fund
more volatile and increase the risks of investing in the Fund.
The
1940 Act requires the Fund to maintain continuous asset coverage of not less
than 300% with respect to all borrowings. This means that the value of the
Fund’s total indebtedness may not exceed one‑third of the value of its total
assets (including such indebtedness). The Fund also may borrow money from banks
or other lenders for temporary purposes in an amount not to exceed 5% of the
Fund’s assets. Such temporary borrowings are not subject to the asset coverage
requirements discussed above.
Leverage
can have the effect of magnifying the Fund’s exposure to changes in the value of
its assets and may also result in increased volatility in the Fund’s net asset
value (“NAV”). This means the Fund will have the potential for greater gains, as
well as the potential for greater losses, than if the Fund owned its assets on
an unleveraged basis. The value of an investment in the Fund will be more
volatile and other risks tend to be compounded if and to the extent that the
Fund is exposed to leverage.
Principal
Investment Risks
The Fund is generally sold to (i) institutional
investors, including registered investment advisers (RIAs), that meet certain
qualifications and have completed an educational program provided by the
Adviser; (ii) clients of such institutional investors; and
(iii) certain other Eligible Investors (as defined in “Eligibility to Buy
Class I Shares and Class M Shares” below). Investors should carefully
consider the Fund’s risks and investment objective, as an investment in the Fund
may not be appropriate for all investors and is not designed to be a complete
investment program.
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.” It is possible
that investing in the Fund may result in a loss of some or all of the amount
invested. Before making an investment/allocation decision,
investors should (i) consider the suitability
S-4
of this investment with respect to an investor’s or a
client’s investment objectives and individual situation and (ii) consider
factors such as an investor’s or a client’s net worth, income, age, and risk
tolerance. Investment should be avoided where an investor/client has a
short-term investing horizon and/or cannot bear the loss of some or all of the
investment.
The
Fund’s shares will fluctuate in price, which may result in a loss of a portion
or all of the money invested in the Fund. Many factors influence a mutual fund’s
performance.
The
following is a summary of certain risks of investing in the Fund. Before
investing, please be sure to read the additional information under “Investment
Objective, Strategies and Risks — More Information Regarding the Risks of
Investing” below.
Reinsurance-Related Securities Risk. The principal risk of an investment in a
reinsurance-related security is that a triggering event(s) (e.g., (i) natural
events, such as a hurricane, tornado or earthquake of a particular
size/magnitude in a designated geographic area; or (ii) non‑natural events,
such as large aviation disasters) will occur, and as a result, the Fund will
lose all or a significant portion of the principal it has invested in the
security and the right to additional interest payments with respect to the
security. If multiple triggering events occur that impact a significant portion
of the portfolio of the Fund, the Fund could suffer substantial losses and an
investor will lose money. A majority of the Fund’s assets will be invested in
reinsurance-related securities tied to natural events and/or non‑natural
disasters and there is inherent uncertainty as to whether, when or where such
events will occur. There is no way to accurately predict whether a triggering
event will occur and, because of this significant uncertainty,
reinsurance-related securities carry a high degree of risk.
Event-Linked Bonds. Event-linked or
catastrophe bonds carry large uncertainties and major risk exposures to adverse
conditions. If a trigger event, as defined within the terms of the bond,
involves losses or other metrics exceeding a specific magnitude in the
geographic region and time period specified therein, the Fund may lose a portion
or all of its investment in such security, including accrued interest and/or
principal invested in such security. Such losses may be substantial. Because
catastrophe bonds cover “catastrophic” events that, if they occur, will result
in significant losses, catastrophe bonds carry a high degree of risk of loss and
are considered “high yield” or “junk bonds.” The rating, if any, primarily
reflects the rating agency’s calculated probability that a pre‑defined trigger
event will occur. Thus, lower-rated bonds have a greater likelihood of a
triggering event occurring and loss to the Fund.
Quota Share Notes and ILW Notes. The Fund may
gain exposure to reinsurance contracts through Quota Share Notes and ILW Notes.
These securities are subject to the same risks discussed herein for event-linked
or catastrophe bonds. In addition, because Quota Share Notes and ILW Notes
represent an interest, either proportional or non‑proportional, in one or more
underlying reinsurance contracts, the Fund has limited transparency into the
individual underlying contract(s) and, therefore, must rely upon the risk
assessment and sound underwriting practices of the sponsor. Accordingly, it may
be more difficult for the Adviser to fully evaluate the underlying risk profile
of the Fund’s investment in Quota Share Notes and ILW Notes, which will place
the Fund’s assets at greater risk of loss than if the Adviser had more complete
information. The lack of transparency may also make the valuation of Quota Share
Notes and ILW Notes more difficult and potentially result in mispricing that
could result in losses to the Fund. See “Illiquidity and Restricted Securities
Risk” and “Valuation Risk” below. In Quota Share Notes trades and ILW Notes
trades, the Fund cannot lose more than the amount invested.
Risk-Modeling Risk. The Adviser, in selecting
investments for the Fund, will generally consider risk models created by
independent third parties, the sponsor of a reinsurance-related security or a
broker. The Adviser may also consider its own risk models based on comparable
prior transactions, quantitative analysis, and industry knowledge. Risk models
are designed to assist investors, governments, and businesses understand the
potential impact of a wide variety of catastrophic events and allow such parties
to analyze the probability of loss in regions with the highest exposure. The
Adviser will use the output of the risk models before and after investment to
assist the Adviser in assessing the risk of a particular reinsurance-related
security or a group of such securities. Risk
S-5
models
are created using historical, scientific and other related data, and they may
use quantitative methods. Because such risk models are based in part upon
historical data and averages, there is no guarantee that such information will
accurately predict the future occurrence, location or severity of any particular
catastrophic event and thus may fail to accurately calculate the probability of
a trigger event and may underestimate the likelihood of a trigger event.
Securities or other investments selected using quantitative methods may perform
differently from the market as a whole or from their expected performance for
many reasons, including factors used in building the quantitative analytical
framework, the weights placed on each factor, and changing sources of market
returns, among others. In addition, any errors or imperfections in a risk model
(quantitative or otherwise), analyses, the data on which they are based or any
technical issues with the construction of the models (including, for example,
data problems and/or software or other implementation issues) could adversely
affect the ability of the Adviser to use such analyses or models effectively,
which in turn could adversely affect the Fund’s performance. Risk models are
used by the Adviser as one input in its risk analysis process for Fund
investments. There can be no assurance that these methodologies will help the
Fund to achieve its investment objective.
Longevity and Mortality Risk. Longevity risk is the risk that members of a
reference population will live longer, on average, than anticipated. Mortality
risk is the risk that members of a reference population will live shorter, on
average, than anticipated. Such risks are among the most significant faced by
life insurers, annuity providers and pension funds because changes in longevity
or mortality rates can significantly affect the liabilities and cash needs of
those entities. Longevity bonds and mortality bonds purchased by the Fund
involve the risk that the Adviser may incorrectly predict the actual level of
longevity or mortality, as applicable, for the reference population of people,
and the Fund will lose all or a portion of the amount of its investment in the
bond. With respect to mortality bonds held by the Fund, there is also the risk
that an epidemic or other catastrophic event could strike the reference
population, resulting in mortality rates exceeding expectations and in the Fund
losing all or a portion of its investment in the bond.
Illiquidity and Restricted Securities
Risk. Illiquidity risk is the risk
that the investments held by the Fund may be difficult or impossible to sell at
the time that the Fund would like without significantly changing the market
value of the investment. As a relatively new type of financial instrument, there
is limited trading history for reinsurance-related securities, even for those
securities deemed to be liquid.
The
Fund may invest at the time of purchase up to 15% of its net assets in
securities that are illiquid. The Adviser believes a sufficient liquid market
exists for reinsurance-related securities in order to meet these requirements.
However, there can be no assurance that a liquid market for the Fund’s
investments will be maintained. The Fund’s ability to realize full value in the
event of the need to liquidate certain assets may be impaired and/or result in
losses to the Fund. The Fund may be unable to sell its investments, even under
circumstances when the Adviser believes it would be in the best interests of the
Fund to do so. Illiquid investments may also be difficult to value and their
pricing may be more volatile than more liquid investments, which could adversely
affect the price at which the Fund is able to sell such instruments. Illiquid
investments may involve greater risk than liquid investments. Illiquidity risk
also may be greater in times of financial stress. The risks associated with
illiquid instruments may be particularly acute in situations in which the Fund’s
operations require cash (such as in connection with redemptions) and could
result in the Fund borrowing to meet its short-term needs or incurring losses on
the sale of illiquid instruments.
Certain
of the instruments in which the Fund may invest are subject to restrictions on
resale by the federal securities laws or otherwise, such as securities offered
privately pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended (the “1933 Act”) and securities issued pursuant to Rule 144A under the
1933 Act. While certain restricted securities may, notwithstanding their
limitations on resale, be treated as liquid if the Adviser determines, pursuant
to the applicable procedures, that such treatment is warranted, there can be no
guarantee that any such determination will continue. Restricted securities
previously determined to be liquid may subsequently become illiquid while held
by the Fund. Even if such restricted securities are not deemed to be illiquid,
they may nevertheless be difficult to value and the Fund may be required to hold
restricted securities when it otherwise would sell such securities or may be
forced to sell securities at a price lower than the price the
S-6
Fund
has valued such securities, and the Fund may incur additional expense when
disposing of restricted securities, including costs to register the sale of the
securities. This may result in losses to the Fund and investors.
Valuation Risk. The Fund is subject to
valuation risk, which is the risk that one or more of the securities in which
the Fund invests are priced incorrectly, due to factors such as incomplete data,
market instability, or human error. In addition, pricing of reinsurance-related
securities is subject to the added uncertainty caused by the inability to
generally predict whether, when or where a natural disaster or other triggering
event will occur. Even after a natural disaster or other triggering event
occurs, the pricing of reinsurance-related securities is subject to uncertainty
for a period of time until event parameters, ultimate loss amounts and other
factors are finalized and communicated to the Fund. The Fund’s investments in
reinsurance-related securities for which market quotations are not available
will be valued pursuant to procedures adopted by the board of trustees of Stone
Ridge Trust (the “Board”). Even for reinsurance-related securities for which
market quotations are generally readily available, upon the occurrence or
possible occurrence of a trigger event, and until the completion of the
settlement and auditing of applicable loss claims, the Fund’s investment in a
reinsurance-related security may be priced using fair value methods. Many of the
Fund’s reinsurance-related securities are priced using fair value methods.
Portfolio securities that are valued using techniques other than market
quotations, including fair valued securities, may be subject to greater
fluctuation in their value from one day to the next than would be the case if
market quotations were used. There is no assurance that the Fund could sell a
portfolio security for the value established for it at any time and it is
possible that the Fund would incur a loss because a portfolio security is sold
at a discount to its established value. If securities are mispriced,
shareholders could lose money upon redemption or could pay too much for shares
purchased.
Moral Hazard Risk. Reinsurance-related
securities are generally subject to one or more types of triggers, including
so‑called “indemnity-triggers.” An indemnity trigger is a trigger based on the
actual losses of the ceding sponsor (i.e., the party seeking reinsurance).
Reinsurance-related securities subject to indemnity triggers are often regarded
as being subject to potential moral hazard, since such reinsurance-related
securities are triggered by actual losses of the ceding sponsor and the ceding
sponsor may have an incentive to take actions and/or risks that would have an
adverse effect on the Fund. For example, if an event-linked bond issued will be
triggered at $500 million in losses to the sponsor, once that trigger is
hit (i.e., the sponsor experiences $500 million in losses under the
contracts it has written), the bond purchaser will lose all or a portion of its
principal invested (plus any additional interest). In this situation, the ceding
sponsor has an incentive to pay the claims more generously when the loss amount
is near the trigger amount set in the bond (i.e., to claim $500 million in
losses, when perhaps it could be argued that actual losses were $499.9 million).
Thus, bonds with indemnity triggers may be subject to moral hazard, because the
trigger depends on the ceding sponsor to properly identify and calculate losses
that do and do not apply in determining whether the trigger amount has been
reached. In short, “moral hazard” refers to this potential for the sponsor to
influence bond performance, as payouts are based on the individual policy claims
against the sponsor and the way the sponsor settles those claims.
Limited Availability and Reinvestment
Risk. Investments in
reinsurance-related securities may be limited, which may limit the amount of
assets the Fund may be able to invest in reinsurance-related securities. The
limited availability of reinsurance-related securities may be due to a number of
factors, including seasonal concentration of issuances, limited selection that
meets the Fund’s investment objective and lack of availability of
reinsurance-related securities in the secondary market. Original issuances of
event-linked bonds (and in particular hurricane-related catastrophe bonds) may
be concentrated in the first two calendar quarters of each year while original
issuances of Quota Share Notes may be concentrated in particular reinsurance
renewal months (January, and to a lesser extent, April, June, and July).
Thereafter, the availability of reinsurance-related securities is subject to
natural fluctuations in the secondary market. Therefore, if reinsurance-related
securities held by the Fund mature or if the Fund must sell securities to meet
redemption requests, the Fund may be required to hold more cash than it normally
would until reinsurance-related securities meeting the Fund’s investment
objective become available. Due to the potentially limited availability of
additional reinsurance-related securities, the Fund may be forced to reinvest in
securities that are lower yielding or less desirable than the securities the
Fund sold. This is known as reinvestment risk, and may reduce the overall return
on its portfolio securities.
S-7
Investments in Non‑Voting Securities Risk. If
the reinsurance-related securities in which the Fund invests carry voting
rights, the Fund ordinarily will limit such investments to 5% or less of the
issuing SPV’s outstanding voting securities. However, to enable the Fund to
invest more of its assets in certain SPVs deemed attractive by the Adviser, the
Fund may also contractually forego its right to vote securities or may purchase
non‑voting securities of such SPVs. If the Fund does not limit its voting rights
and is deemed an “affiliate” of the SPV, the ability of the Fund to make future
investments in the SPV or to engage in other transactions would be severely
limited by the requirements of the 1940 Act. Such limitations may interfere with
portfolio management of the Fund which may adversely impact the Fund’s
performance. To the extent the Fund holds non‑voting securities of an SPV, or
contractually foregoes its right to vote securities of an SPV, it will not be
able to vote to the full extent of its economic interest on matters that require
the approval of the investors in the SPV, including matters that could adversely
affect the Fund’s investment in the SPV.
Reinsurance Industry Risk. The performance of
reinsurance-related securities and the reinsurance industry itself are tied to
the occurrence of various triggering events, including weather, natural
disasters (hurricanes, earthquakes, etc.), non‑natural large catastrophes and
other specified events causing physical and/or economic loss. Triggering events
are typically defined by three criteria: an event; a geographic area in which
the event must occur; and a threshold of economic or physical loss (either
actual or modeled) caused by the event, together with a method to measure such
loss. Generally, the event is either a natural or non‑natural peril of a kind
that results in significant physical or economic loss. Natural perils include
disasters such as hurricanes, earthquakes, windstorms, pandemics, epidemics,
fires and floods. Non‑natural perils include disasters resulting from human
activity, such as commercial and industrial accidents or business interruptions.
Major natural disasters in populated areas (such as in the cases of Hurricane
Katrina in New Orleans in 2005, Superstorm Sandy in the New York City
metropolitan area in 2012, Hurricane Irma in Florida and the Caribbean in 2017
and Hurricane Ian in Florida in 2022) or related to high-value insured property
(such as plane crashes) can result in significant losses and investors in
reinsurance-related securities tied to such exposures may also experience
substantial losses. If the likelihood and severity of natural and other large
disasters increase, the risk of significant losses to reinsurers may increase.
Typically, one significant triggering event (even in a major metropolitan area)
will not result in financial failure to a reinsurer. However, a series of major
triggering events could cause the failure of a reinsurer. Similarly, to the
extent the Fund invests in reinsurance-related securities for which a triggering
event occurs, losses associated with such event will result in losses to the
Fund and a series of major triggering events affecting a large portion of the
reinsurance-related securities held by the Fund will result in substantial
losses to the Fund. In addition, unexpected events such as natural disasters or
terrorist attacks could lead to government intervention. Political, judicial and
legal developments affecting the reinsurance industry could also create new and
expanded theories of liability or regulatory or other requirements; such changes
could have a material adverse effect on the Fund.
Floating-Rate Instrument Risks. A significant percentage of the
reinsurance-related securities in which the Fund invests are variable rate, or
floating-rate, event-linked bonds. Floating-rate instruments and similar
investments may be illiquid or less liquid than other investments. In addition,
while the collateral securing most event-linked bonds in which the Fund
currently intends to invest is typically invested in low‑risk investments,
certain SPVs in which the Fund invests may permit investment of collateral in
higher risk, higher yielding investments. Thus, the value of collateral, if any,
securing the Fund’s investments in event-linked bonds can decline or may be
insufficient to meet the issuer’s obligations, and the collateral, if repaid to
the Fund, may be difficult to liquidate. Market quotations for these securities
may be volatile and/or subject to large spreads between bid and ask prices.
Below-Investment-Grade Securities and Unrated
Securities Risk. The Fund has exposure and may, without limitation,
continue to have exposure to reinsurance-related securities that are rated below
investment grade or that are unrated but are judged by the Adviser to be of
comparable quality. Below-investment-grade debt securities, which are commonly
called “junk bonds,” are rated below BBB‑ by S&P Global Ratings or Baa3 by
Moody’s Investors Service, Inc., or have comparable ratings by another rating
organization. Accordingly, certain of the Fund’s unrated investments could
constitute a highly risky and speculative investment, similar to an investment
in “junk bonds.”
S-8
The
rating primarily reflects the rating agency’s calculated probability that a
pre‑defined trigger event will occur. Therefore, securities with a lower rating
reflect the rating agency’s assessment of the substantial risk that a triggering
event will occur and result in a loss. The rating also reflects the
reinsurance-related security’s credit risk and the model used to calculate the
probability of the trigger event. The rating system for reinsurance-related
securities is relatively new and significantly less developed than that of
corporate bonds and continues to evolve as the market develops. There is no
minimum rating on the instruments in which the Fund may invest.
Borrowing and Leverage Risk. The Fund has
obtained financing to make investments in reinsurance-related securities and may
obtain financing to meet redemption requests
and to address cash flow timing mismatches. Therefore, the Fund is
subject to leverage risk. The Fund’s borrowings, which would typically be in the
form of loans from banks or reverse repurchase agreements, may be on a secured
or unsecured basis and at fixed or variable rates of interest. Leverage
magnifies the Fund’s exposure to declines in the value of one or more underlying
reference assets or creates investment risk with respect to a larger pool of
assets than the Fund would otherwise have and may be considered a speculative
technique. This risk is enhanced for the Fund because it invests substantially
all its assets in reinsurance-related securities. Reinsurance-related securities
can quickly lose all or much of their value if a triggering event occurs. Thus,
to the extent assets subject to a triggering event are leveraged, the losses
could substantially outweigh the Fund’s investment and result in significant
losses to the Fund. The value of an investment in the Fund will be more volatile
and other risks tend to be compounded if and to the extent the Fund borrows or
uses derivatives or other investments that have embedded leverage. The Fund’s
ability to obtain leverage through borrowings is dependent on its ability to
establish and maintain an appropriate line of credit or other borrowing
facility. Borrowing gives rise to interest expense and may require the Fund to
pay other fees. Unless the rate of return, net of applicable Fund expenses, on
the Fund’s investments exceeds the costs to the Fund of the leverage it
utilizes, the investment of the Fund’s net assets attributable to leverage will
generate less income than will be needed to pay the costs of the leverage to the
Fund, resulting in a loss to the Fund, even if the rate of return on those
assets is positive.
Derivatives Risk. The Fund may invest in a
variety of derivatives, including options, futures contracts and swaps. The use
of derivatives involves risks that are in addition to, and potentially greater
than, the risks of investing directly in securities and other more traditional
assets. Derivatives are financial contracts the value of which depends on, or is
derived from, an asset or other underlying reference. Derivatives involve the
risk that changes in their value may not move as expected relative to changes in
the value of the underlying reference asset they are designed to track. The Fund
may invest in derivatives for investment purposes and for hedging and risk
management purposes. Derivatives risk may be more significant when derivatives
are used to enhance return or as a substitute for a cash investment option,
rather than solely to hedge the risk of a position held by the Fund. See the
Statement of Additional Information for additional information of the various
types and uses of derivatives in the Fund’s strategy.
The
Fund may be required to provide more margin for its derivative investments
during periods of market disruptions or stress.
Derivatives
also present other risks described herein, including market risk, illiquidity
risk, currency risk, counterparty risk and credit risk. OTC derivatives are
generally highly illiquid. Many derivatives, in particular OTC derivatives, are
complex and their valuation often requires modeling and judgment, which
increases the risk of mispricing or improper valuation.
The
Fund’s use of OTC derivatives exposes it to the risk that the
counterparties will be unable or unwilling to make timely settlement payments or
otherwise honor their obligations. If the counterparty defaults, the Fund will
still have contractual remedies but may not be able to enforce them. The Fund
may invest in derivatives with a limited number of counterparties, and events
affecting the creditworthiness of any of those counterparties may have a
pronounced effect on the Fund.
The
Fund’s use of derivatives may not be effective or have the desired results.
Moreover, suitable derivatives will not be available in all circumstances. The
Adviser may decide not to use derivatives to hedge or otherwise reduce the
Fund’s risk exposures, potentially resulting in losses for the Fund.
S-9
Many
derivatives have embedded leverage (i.e., a notional value in excess of the
assets needed to establish and/or maintain the derivative position). Derivatives
in which the Fund may invest (e.g., options, futures and swaps) may have
embedded leverage, depending on their specific terms. As a result, adverse
changes in the value or level of the underlying investment may result in a loss
substantially greater than the amount invested in the derivative itself. See
“Borrowing and Leverage Risk” above.
Rule
18f‑4 under the 1940 Act (“Rule 18f‑4”) provides for the regulation of a
registered investment company’s use of derivatives and certain related
instruments. Funds that use derivatives to a limited extent, such as the Fund,
are generally required by Rule 18f‑4 to adopt policies and procedures reasonably
designed to manage the fund’s derivatives risk. In connection with the adoption
of Rule 18f‑4, the Commission also eliminated the asset segregation framework
arising from prior Commission guidance for covering derivatives and certain
financial instruments. As a result, to the extent the Fund uses derivatives, it
will comply with the relevant requirements of Rule 18f‑4. Rule 18f‑4 restricts
the Fund’s ability to engage in certain derivatives transactions, which could
adversely affect the value or performance of the Fund.
Specific
risks involved in the use of certain types of derivatives in which the Fund may
invest include:
Swaps Risk. The Fund may obtain event-linked
exposure by investing in, among other things, event-linked swaps, which
typically are contingent, or formulaically related to defined trigger events, or
by pursuing similar event-linked derivative strategies. Trigger events include
hurricanes, earthquakes, weather-related phenomena and other criteria determined
by independent parties. If a trigger event(s) occurs, the Fund may lose the
swap’s notional amount. As derivative instruments, event-linked swaps are
subject to risks in addition to the risks of investing in reinsurance-related
securities, including risks associated with the counterparty and leverage.
Epidemic and Pandemic Risk. The impact of
COVID‑19, and other infectious illness outbreaks that may arise in the future,
could adversely affect the economies of many nations or the entire global
economy, individual issuers and capital markets in ways that cannot necessarily
be foreseen. In addition, the impact of infectious illnesses in emerging market
countries may be greater due to generally less established healthcare systems.
Public health crises caused by the COVID‑19 outbreak may exacerbate other
pre‑existing political, social and economic risks in certain countries or
globally. Such impacts present material uncertainty and risk with respect to the
Fund’s investment performance and financial results. The impact of COVID‑19 or
any future public health crisis may also heighten the other risks disclosed in
this prospectus.
Credit Risk.
The reinsurance-related securities in which the Fund invests will be
subject to credit risk. The principal invested in many reinsurance-related
securities is held by the SPV in a collateral account and invested in various
permissible assets set forth under the terms of the SPV. In these cases,
typically, the collateral account is invested in high quality U.S. government
securities (i.e., U.S. Treasury bonds). However, in certain reinsurance-related
securities, the collateral account may be invested in high yielding, higher risk
securities, which may include securities issued by entities managed by the
Adviser. Collateral will generally be invested in accordance with the terms of
the SPV and overseen by a collateral manager appointed by the SPV; therefore,
the Fund is dependent upon the manager to invest the collateral account proceeds
appropriately. A small portion of the reinsurance-related securities in which
the Fund invests may, in lieu of such collateral account arrangements, provide
for the collateral to be held by the reinsurer. When a collateral account is
invested in higher yielding, higher risk securities or when the collateral is
held directly by the reinsurer, the Fund will be subject to the risk of
non‑payment of scheduled principal and interest on such collateral. Such
non‑payments and defaults may reduce the income to the Fund and negatively
impact the value of Fund shares.
Foreign Investing Risk. The Fund may invest in
reinsurance-related securities issued by foreign sovereigns and foreign entities
that are corporations, partnerships, trusts or other types of business entities.
Because the majority of reinsurance-related security issuers are domiciled
outside the United States, the Fund will normally invest significant amounts of
its assets in foreign (non‑U.S.) entities. Accordingly, the Fund may invest
without limitation in securities issued by foreign entities, including those in
emerging market countries. Certain SPVs in which the Fund invests may be
sponsored by foreign insurers that are not subject to the same regulation as
that to which U.S. insurers are subject. Such SPVs may pose a greater risk of
loss, for example, due to less stringent
S-10
underwriting
and/or risk-retention requirements. The Fund’s investments in event-linked
bonds, Quota Share Notes and ILW Notes provide the Fund with contractual rights
under the terms of the issuance. While the contractual rights of such
instruments are similar whether they are issued by a U.S. issuer or a foreign
issuer, there may be certain additional risks associated with foreign issuers.
For example, foreign issuers could be affected by factors not present in the
U.S., including expropriation, confiscatory taxation, lack of uniform accounting
and auditing standards, less publicly available financial and other information,
potential difficulties in enforcing contractual obligations, and increased costs
to enforce applicable contractual obligations outside the U.S. Fluctuations in
foreign currency exchange rates and exchange controls may adversely affect the
market value of the Fund’s investments in foreign securities. See “Currency
Risk” below. Settlements of securities transactions in foreign countries are
subject to risk of loss, may be delayed and are generally less frequent than in
the U.S., which could affect the liquidity of the Fund’s assets.
Currency Risk. The Fund’s shares are priced in
U.S. dollars and the distributions paid by the Fund are paid in U.S. dollars,
and it is expected that a substantial portion of the Fund’s investments in
reinsurance-related securities will be U.S. dollar denominated investments.
However, a portion of the Fund’s assets may be denominated in foreign (non‑U.S.)
currencies and income received by the Fund from a portion of its investments may
be paid in foreign currencies, and to the extent the Fund invests in non‑U.S.
dollar denominated instruments, a change in the value of a foreign currency
against the U.S. dollar will result in a change in the U.S. dollar value of
securities denominated in that foreign currency. If the U.S. dollar rises in
value against a foreign currency, a security denominated in that currency will
be worth less in U.S. dollars and if the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency will be worth more
in U.S. dollars. Currency risk also includes the risk that a currency to which
the Fund has obtained exposure through hedging declines in value relative to the
currency being hedged, in which event the Fund may realize a loss both on the
hedging instrument and on the currency being hedged. Currency exchange rates can
fluctuate significantly for many reasons. Derivative transactions in foreign
currencies (such as futures, forwards, options and swaps) may involve leverage
risk in addition to currency risk. Some countries have and may continue to adopt
internal economic policies that affect their currency valuations in a manner
that may be disadvantageous for U.S. investors or U.S. companies seeking to do
business in those countries.
Equity Investing Risk. The Fund may at times invest in equity
securities, which may be publicly or privately offered. The equity securities in
which the Fund invests may be more volatile than the equity markets as a
whole. Equity investing risk is the risk
that the value of equity instruments to which the Fund is exposed will fall due
to general market or economic conditions; overall market changes; local,
regional or global political, social or economic instability; currency, interest
rate and commodity price fluctuations; perceptions regarding the industries in
which the issuers participate, and the particular circumstances and performance
of the issuers. Market conditions may affect certain types of equity securities
to a greater extent than other types. Although equities have historically
generated higher average returns than debt securities over the long term, equity
securities also have experienced significantly more volatility in returns.
Finally, the prices of equities are also sensitive to rising interest rates, as
the costs of capital rise and borrowing costs increase.
Market Risk. The value of the Fund’s
investments may decline, sometimes rapidly or unpredictably, due to general
economic conditions that are not specifically related to a particular issuer,
such as real or perceived adverse economic or political conditions throughout
the world, changes in interest or currency rates or adverse investor sentiment
generally. The value of the Fund’s investments also may decline because of
factors that affect a particular industry or industries. Additionally, the
Fund’s performance may be negatively impacted by current market factors such as
military conflicts abroad, global supply chain issues and inflation.
Management and Operational Risk. The Fund is
subject to management risk because it relies on the Adviser’s ability to achieve
its investment objective. The Fund runs the risk that the Adviser’s investment
techniques will fail to produce desired results and cause the Fund to incur
significant losses. The Adviser may select investments that do not perform as
anticipated by the Adviser, may choose to hedge or not to hedge positions at
disadvantageous times and may fail to use derivatives effectively.
S-11
Any
imperfections, errors, or limitations in quantitative analyses and models used
by the Adviser as part of its investment process could affect the Fund’s
performance.
The
Fund also is subject to the risk of loss as a result of other services provided
by the Adviser and other service providers, including pricing, administrative,
accounting, tax, legal, custody, transfer agency and other services. Operational
risk includes the possibility of loss caused by inadequate procedures and
controls, human error and cyber attacks, disruptions and failures affecting, or
by, a service provider.
Tax Risk. The Fund currently intends to qualify
for treatment as a regulated investment company (“RIC”) under Subchapter M of
Chapter 1 of the Internal Revenue Code of 1986, as amended (the “Code”). In
order to qualify for such treatment, the Fund must derive at least 90% of its
gross income each taxable year from qualifying income, meet certain asset
diversification tests at the end of each fiscal quarter, and distribute at least
90% of its investment company taxable income for each taxable year. The
Fund’s investment strategy will potentially be limited by its intention to
qualify for treatment as a RIC. The tax treatment of certain of the Fund’s
investments under one or more of the qualification or distribution tests
applicable to RICs is not certain. An adverse determination or future guidance
by the IRS or a change in law might affect the Fund’s ability to qualify for
such treatment.
If,
in any year, the Fund were to fail to qualify for treatment as a RIC under the
Code for any reason, and were not able to cure such failure, the Fund would be
subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax‑exempt income
and net long-term capital gains, would be taxable to shareholders as dividends.
Expense Risk. Your actual costs of investing in
the Fund may be higher than the expenses shown in “Annual Fund Operating
Expenses” for a variety of reasons. The Fund’s expense limitation agreement,
which generally remains in effect for a period of one year, mitigates this risk.
However, there is no assurance that the Adviser will renew such expense
limitation agreement from year‑to‑year.
Performance
The bar chart and table below provide some
indication of the risks of investing in the Fund by showing changes in the
performance of the Fund’s Class I Shares from year to year and by comparing
the Fund’s average annual total returns for the periods indicated with those of
a broad measure of market performance. Past performance (before and after taxes) is not
an indication of future performance. Performance data current to
the most recent month end may be obtained by calling (855)
609-3680.
|
|
|
|
|
|
|
| |
Best
Quarter
(as
of
December 31, 2023) |
|
Worst
Quarter
(as
of
December 31, 2023) |
Q4 2022 7.49% |
|
Q3 2022 (10.29)% |
S-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Average Annual Total Returns for the periods
ended December 31, 2023 |
|
|
One Year |
|
Five Years |
|
Ten Years |
Class I Shares |
|
|
|
|
| |
|
|
|
| |
|
|
| |
Return
Before Taxes |
|
|
|
21.05% |
| |
|
|
5.90% |
| |
|
|
4.93% |
|
Return
After Taxes on Distributions |
|
|
|
15.24% |
| |
|
|
3.21% |
| |
|
|
2.24% |
|
Return
After Taxes on Distributions and Sale of Fund Shares |
|
|
|
12.30% |
| |
|
|
3.34% |
| |
|
|
2.54% |
|
Class M Shares |
|
|
|
|
| |
|
|
|
| |
|
|
| |
Return
Before Taxes |
|
|
|
21.10% |
| |
|
|
5.76% |
| |
|
|
4.80% |
|
ICE BofA
Merrill Lynch 3‑Month U.S. Treasury Bill Index (reflects no deduction for
fees, expenses or taxes) |
|
|
|
5.05% |
| |
|
|
1.89% |
| |
|
|
1.26% |
|
After‑tax returns are shown for Class I
Shares only. After‑tax returns for Class M Shares will
differ. After tax returns are calculated using the
historical highest individual federal marginal income tax rates and do not
reflect the impact of state and local taxes. The “Return After Taxes on Distributions and Sale
of Fund Shares” is higher, in some cases, than other return figures because when
a capital loss occurs upon redemption of Fund shares, a tax deduction is
provided that benefits the investor. Actual after‑tax returns depend on your situation
and may differ from those shown. Furthermore, the after‑tax returns shown are
not relevant to those who hold their shares through tax‑deferred arrangements
such as 401(k) plans or individual retirement accounts (“IRAs”).
Management
Investment Adviser
Stone
Ridge Asset Management LLC is the Fund’s investment adviser.
Portfolio Managers
Paul
Germain, Alexander Nyren, Benjamin Robbins, Ross Stevens and Igor Zhitnitsky
(the “Portfolio Managers”) are jointly and primarily responsible for the
day‑to‑day management of the Fund. Mr. Stevens has been a Portfolio Manager
since the Fund’s inception, except for the period from February 2020 to February
2021. Mr. Nyren has been a Portfolio Manager since February 2014.
Mr. Robbins has been a Portfolio Manager since May 2015. Mr. Germain,
and Mr. Zhitnitsky have been Portfolio Managers since February 2021.
Purchase
and Sale of Fund Shares
Investors
may purchase the Fund’s Class I shares and Class M shares by first
contacting the Adviser at (855) 609‑3680 to notify the Adviser of the
proposed investment. Once notification has occurred, the investor will be
directed to the Fund’s transfer agent to complete the purchase or sale
transaction. The Fund is generally sold to (i) institutional investors,
including registered investment advisers (RIAs), that meet certain
qualifications and have completed an educational program provided by the
Adviser; (ii) clients of such institutional investors; and
(iii) certain other Eligible Investors (as defined in “Eligibility to Buy
Class I Shares and Class M Shares” below). All investments are subject
to approval of the Adviser. The Fund may close at any time to new investments,
and if the Fund closes, its shares will only be available for purchase after the
Fund has notified investors that it is no longer closed to new investments. See
“Shareholder Information — Fund Closings” below.
The
minimum initial investment (which may be waived or reduced in certain
circumstances) is $25 million for Class I shares and $250,000 for
Class M shares. These minimums may be modified and/or applied in the
aggregate for certain intermediaries that submit trades on behalf of underlying
investors (e.g., registered investment advisers or benefit plans). Differences
in the policies of different intermediaries may include different minimum
investment amounts. There is no minimum for subsequent investments. All share
purchases are subject to approval of the Adviser.
S-13
Fund
shares may be redeemed on any business day, which is any day the New York Stock
Exchange is open for business, by writing to Stone Ridge Trust, c/o U.S. Bank
Global Fund Services, 615 East Michigan Street, Milwaukee, Wisconsin 53202, or
by calling (855) 609‑3680. Investors who invest in the Fund through an
intermediary should contact their intermediary regarding redemption procedures.
Tax
Information
The
Fund’s distributions are expected to be taxed as ordinary income and/or capital
gains, unless you are exempt from taxation or investing through a tax‑advantaged
arrangement, such as a 401(k) plan or an individual retirement account. If you
are investing through a tax‑advantaged arrangement, you may be taxed upon
withdrawals from that arrangement.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase the Fund through a broker-dealer or other financial intermediary,
the Fund and its related companies may pay the intermediary as described under
“Intermediary and Servicing Arrangements” below. These payments may create a
conflict of interest by influencing the broker-dealer or other intermediary to
recommend the Fund over another investment. Contact your financial intermediary
for more information.
S-14
INVESTMENT
OBJECTIVE, STRATEGIES AND RISKS
Under
normal circumstances, the Fund will invest at least 80% of its net assets, plus
the amount of any borrowings for investment purposes, in reinsurance-related
securities. In addition, the Fund will also invest at least 80% of its net
assets, plus the amount of any borrowings for investment purposes, in high
yield, high risk debt securities (commonly referred to as “junk bonds”).
(Together, these are referred to as the “80% Policies”). High yield securities
typically are of below-investment-grade quality, and may either have
below-investment-grade credit ratings, which ratings are associated with
securities having high risk, speculative characteristics, or may be unrated but
of comparable quality to securities with below-investment-grade credit ratings.
The Fund’s investment objective and policies may be changed without shareholder
approval unless an objective or policy is identified in the prospectus or in the
Statement of Additional Information as “fundamental.” The Fund will provide
written notice to shareholders at least 60 days prior to a change in its 80%
Policy.
More Information Regarding Investment Strategies
The
Fund pursues its investment objective by investing primarily in
reinsurance-related securities, including event-linked bonds, Quota Share Notes
and, to a lesser extent, in ILW Notes, event-linked swaps, and equity securities
(publicly or privately offered) or the derivatives of equity securities of
companies in the reinsurance and insurance industry (collectively,
“reinsurance-related securities”).
Event-linked
bonds are variable rate debt securities for which the return of principal and
payment of interest are contingent on the non‑occurrence of a specified trigger
event(s) that leads to economic and/or human loss, such as an earthquake of a
particular magnitude or a hurricane of a specific category. The most common type
of event-linked bonds is known as “catastrophe” or “CAT” bonds. The Fund may
invest in event-linked bonds in one or more of three ways: the Fund may purchase
event-linked bonds when initially offered; the Fund may purchase event-linked
bonds in the secondary, over‑the‑counter (“OTC”) market; or the Fund may gain
indirect exposure to event-linked bonds using derivatives. The Fund may pursue
other types of event-linked derivative strategies using derivative instruments
that are typically contingent, or formulaically related to defined trigger
events.
Trigger
events may include hurricanes, earthquakes and weather-related phenomena,
pandemics, epidemics, non‑natural catastrophes, such as plane crashes, or other
events resulting in a specified level of physical or economic loss, such as
mortality or longevity. Trigger events are typically defined by three criteria:
an event; a geographic area in which the event must occur; and a threshold of
economic or physical loss (either actual or modeled) caused by the event,
together with a method to measure such loss. In order for a trigger event to be
deemed to have occurred, each of the three criteria must be satisfied while the
bond is outstanding or the derivative position remains open. The Fund has no
limit as to the types of events, geographic areas or thresholds of loss
referenced by event-linked bonds in which it can invest. Generally, the event is
either a natural or non‑natural peril of a kind that results in significant
physical or economic loss. Natural perils include disasters such as hurricanes,
earthquakes, windstorms, pandemics, epidemics, fires and floods. Non‑natural
perils include disasters resulting from human activity such as commercial and
industrial accidents or business interruptions. Some event-linked bonds
reference only a single event. Other event-linked bonds may reference multiple
events, the occurrence of any one (or other number) of which would satisfy these
criteria. Alternatively, an event-linked bond may not specify a particular
peril. In these cases, only the geographic area and threshold of physical or
economic loss determines whether a trigger event has occurred. For example,
certain event-linked bonds, commonly referred to as “mortality” bonds (discussed
further below), have trigger events that are deemed to occur if a specific
number of deaths occur in an identified geographic area regardless of the peril
which caused the loss of life.
If
the trigger event(s) occurs prior to a bond’s maturity, the Fund may lose all or
a portion of its principal and forgo additional interest. In this regard,
event-linked bonds typically have a special condition that states that if the
sponsor suffers a loss from a particular pre‑defined catastrophe or other event
that results in physical and/or economic loss, then the issuer’s obligation to
pay interest and/or repay the principal is either deferred or completely
forgiven. For example, if the Fund holds a bond that covers a sponsor’s losses
due to a hurricane with
1
a
“trigger” at $1 billion and a hurricane hits causing $1 billion or
more in losses to such sponsor, then the Fund will lose all or a portion of its
principal invested in the bond and forgo all or a portion of any future interest
payments. If the trigger event(s) does
not occur, the Fund will recover its principal plus interest. Interest typically
accrues and is paid on a quarterly basis for the specified duration of the bond,
as long as the trigger event(s) does not occur. Although principal typically is
repaid only on the maturity date, it may be repaid in installments, depending on
the terms of the bond.
The
Fund may invest in both longevity bonds and mortality bonds, which are
fixed-income securities, typically issued by special purpose vehicles. The terms
of a longevity bond typically provide that the investor in the bond will receive
less than the bond’s par amount at maturity if the actual average longevity
(life span) of a specified population of people observed over a specified period
of time (typically measured by a longevity index) is higher than a specified
level. If longevity is higher than expected, the bond will return less than its
par amount at maturity, and could return no principal at maturity. Other types
of longevity bonds may provide that if the actual average longevity of two
separate populations of people observed over a specified period of time diverge
by more than a specified amount, the bonds will pay less than their par amount
at maturity. A mortality bond, in contrast to a longevity bond, typically
provides that the investor in the bond will receive less than the bond’s par
amount at maturity if the mortality rate of a specified population of people
observed over a specified period of time (typically measured by a mortality
index) is higher than a specified level. Some mortality bonds, often referred to
as “extreme mortality bonds” contain remote event triggers, which provide that
the bonds will lose principal only if the mortality rate of the specified
population is substantially higher than the expected level. During their term,
both longevity bonds and mortality bonds typically pay a floating rate of
interest to investors. The Fund may also gain this type of exposure through
event-linked derivative instruments, such as swaps, that are contingent on or
formulaically related to longevity or mortality risk.
When
selecting event-linked bonds, Quota Share Notes and other reinsurance-related
securities for investment, Stone Ridge Asset Management LLC (“Stone Ridge” or
the “Adviser”) evaluates the evolving universe of reinsurance-related securities
by performing its own analysis based on quantitative and qualitative research.
The Adviser may rely upon information and analysis obtained from brokers,
dealers and ratings organizations, among other sources. The Adviser then uses
quantitative and qualitative analysis to select appropriate reinsurance-related
securities within each trigger-event category. Trigger event categories include
“indemnity triggers,” which are tied to the losses of the issuer; “parametric
triggers,” which are tied to the non‑occurrence of specific events with defined
parameters; “industry loss triggers,” which are tied to industry-wide losses;
and “modeled loss triggers,” which are tied to the hypothetical losses resulting
from a modeled event and could be issuer-specific or industry-wide. Certain
investments may have multiple triggers or a combination of the different types
of triggers. The Adviser’s qualitative and quantitative analysis may consider
various factors, such as trigger transparency, sponsor basis risk, call
provisions, moral hazard, and correlation with other investments, and will also
guide the Adviser in determining the desired allocation of reinsurance-related
securities by peril and geographic exposure.
The
Fund may also seek to gain exposure to reinsurance contracts by holding notes or
preferred shares issued by a special purpose vehicle (“SPV”) whose performance
is tied to underlying reinsurance transaction(s), including Quota Share Notes
and ILW Notes. The Fund, as holder of a note or preferred share issued by the
SPV, would be entitled to participate in the underwriting results and investment
earnings associated with the SPV’s underlying reinsurance contracts.
The
Fund may also enter into other types of investments that enable the Fund to
provide risk transfer services, as the Adviser may consider appropriate from
time to time.
Reinsurance-Related Securities. The Fund will
invest substantially in reinsurance-related securities, including “event-linked”
bonds (a type of reinsurance-related security, which sometimes are referred to
as “insurance-linked” or “catastrophe” bonds), Quota Share Notes and ILW Notes.
Event-Linked Bonds. Event-linked bonds are
variable rate debt securities for which the return of principal and payment of
interest are contingent on the non‑occurrence of a specified trigger event(s)
that leads to economic
2
and/or
human loss, such as an earthquake of a particular magnitude or a hurricane of a
specific category. In most cases, the trigger event(s) will not be deemed to
have occurred unless the event(s) happened in a particular geographic area and
was of a certain magnitude (based on independent scientific readings) and/or
caused a certain amount of actual or modeled loss. Geographic areas identified by event-linked
bonds range broadly in scope. A limited number of event-linked bonds do not
identify a geographic area, meaning that the event can occur anywhere. The
majority of event-linked bonds relate to events occurring within the United
States (or a single state or group of states within the United States), Europe
(or a single European country) or Japan. Event-linked bonds also identify a
threshold of physical or economic loss. The trigger event is deemed to have
occurred only if the event meets or exceeds the specified threshold of physical
or economic loss. Some event-linked bonds base the occurrence of the trigger
event on losses reported by a specific insurance company or by the insurance
industry. Other event-linked bonds base the occurrence of the trigger event on
modeled payments (for a single insurer or across the insurance industry), an
industry index or indices, or readings of scientific instruments. Some
event-linked bonds utilize a combination of the aforementioned thresholds. The
Fund is entitled to receive principal and interest payments so long as no
trigger event(s) occurs of the description and magnitude specified by the
instrument. Event-linked bonds may be sponsored by government agencies,
insurance companies, reinsurers, special purpose corporations or other on‑shore
or off‑shore entities. Event-linked bonds are typically rated by at least one
nationally recognized statistical rating agency, but also may be unrated. The
rating for an event-linked bond, if any, primarily reflects the rating agency’s
calculated probability that a pre‑defined trigger event(s) will occur. This
rating also reflects the event-linked bond’s credit risk and the model used to
calculate the probability of a trigger event.
Other Event-Linked Securities. The Fund may
also seek to gain exposure to reinsurance contracts by holding notes or
preferred shares issued by an SPV whose performance is tied to underlying
reinsurance transaction(s). In implementing the Fund’s investment strategy,
Stone Ridge will seek to invest in reinsurance-related securities tied to a
varied group of available perils and geographic regions. Further, within each
region and peril, Stone Ridge seeks to hold a balance of exposures to underlying
insurance and reinsurance carriers, trigger types, and lines of business.
Investments
in Quota Share Notes provide exposure to a form of proportional reinsurance in
which an investor participates in the premiums and losses of a reinsurer’s
portfolio according to a pre‑defined percentage. For example, under a 20%
quota-share agreement, the SPV would obtain 20% of all premiums of the subject
portfolio while being responsible for 20% of all claims, and the Fund, as holder
of a Quota Share Note issued by the SPV, would be entitled to its pro rata share
of the premiums received by the SPV and would be responsible for its pro rata
share of the claims, up to the total amount invested. The Fund will generally
seek to gain exposure to geographically diversified natural catastrophe Quota
Share Notes and the Quota Share Notes in which the Fund invests will typically
be high yield, high risk instruments.
Investments
in ILW Notes provide exposure to a transaction through which one party
(typically, an insurance company or reinsurance company, or a
reinsurance-related asset manager) purchases protection based on the total loss
arising from a catastrophic event to the entire insurance industry rather than
the losses of any particular insurer. For example, the buyer of a
“$100 million limit US Wind ILW attaching at $20 billion” will pay an
upfront premium to a protection writer (i.e., the reinsurer or an SPV) and in
return will receive $100 million if total losses to the insurance industry
from a single US hurricane exceed $20 billion. The industry loss
($20 billion in this case) is often referred to as the “trigger” and is
reported by an independent third party after an event has occurred. The amount
of protection offered by the contract ($100 million in this case) is
referred to as the “limit.” ILW Notes could also provide exposure to
transactions linked to an index not linked to insurance industry losses, such as
wind speed or earthquake magnitude and location. The Fund, as holder of an ILW
Note, would be entitled to a return linked to the premium paid by the sponsor
and the occurrence or non‑occurrence of the trigger event.
SPVs. If a “sponsor,” such as an insurance
company or reinsurance company (a company that insures insurance companies),
wants to transfer some or all of the risk it assumes in insuring against certain
losses, it can set up a separate legal structure — commonly known as an SPV.
Municipal, state and foreign governments and private
3
companies
may also sponsor catastrophe bonds as a hedge against natural or non‑natural
disasters. The SPV is a passive and independent intermediary structure standing
between the bond holders and the sponsor. Immediately after issuing the bonds to
investors, the SPV enters into a “cover agreement” with the sponsor, through
which the SPV provides the sponsor with a measure of protection against
specified catastrophic or other similar events. The SPV generally puts the
proceeds received from the bond issuance (the “principal”) into a trust account.
The SPV uses this principal amount as “collateral” in order to secure its
obligation under the cover agreement. The principal amount from the bond
issuance held as collateral is generally invested into high-quality instruments
(such as U.S. Treasury securities or U.S. Treasury money market funds). The earnings on these instruments, as well as insurance or
reinsurance premiums paid by the sponsor, are used to make periodic, variable
rate interest payments to investors (e.g., the Fund). The reinsurance-related
securities typically have rates of interest that reflect the returns of such
short-term collateral investments, plus a premium.
As
long as the corresponding trigger event(s) covered by the bond — whether a
windstorm in Europe or an earthquake in California — does not occur during the
time investors own the bond, investors will receive their interest payments and,
when the bond matures, their principal back from the SPV. Many catastrophe bonds
mature in three years, although terms generally range from one to five years,
depending on the bond. If the event does occur, however, the sponsor’s right to
the collateral is “triggered.” This means the sponsor receives the collateral,
instead of investors receiving it when the bond matures, causing investors to
lose most — or all — of their principal and unpaid interest payments. When this
happens, the SPV might also have the right to extend the maturity of the bonds
to verify that the trigger did occur or to process and audit insurance claims.
Depending on the bond, the extension can last anywhere from three months to two
years or more.
Illiquid and Restricted Securities. The board
of trustees of Stone Ridge Trust (the “Board”) has delegated to the Adviser the
responsibility for determining whether the securities in which the Fund invests
are liquid or illiquid, which Stone Ridge carries out on a case‑by‑case basis
based on procedures approved by the Board that set forth various factors
relating to the Fund’s ability to dispose of such securities in an appropriate
manner. Certain of the instruments in which the Fund may invest, including most
event-linked bonds, Quota Share Notes and ILW Notes, are restricted securities
in that their disposition is restricted by the federal securities laws or
otherwise, such as securities offered privately pursuant to Section 4(a)(2)
of the Securities Act of 1933, as amended (the “1933 Act”) and securities issued
pursuant to Rule 144A under the 1933 Act. Notwithstanding these limitations on
resale, certain restricted securities may be treated as liquid if the Adviser
determines pursuant to the applicable procedures that such treatment is
warranted. The Board will monitor and periodically review liquidity
determinations. The Fund may invest at the time of purchase up to 15% of its net
assets in securities that are illiquid, which may be difficult to value properly
and may involve greater risks than liquid securities. For certain risks related
to the Fund’s investments in illiquid instruments, see “More Information
Regarding the Risks of Investing —
Illiquidity and Restricted Securities Risk” below.
Below-Investment-Grade Securities. Because most
event-linked bonds, Quota Share Notes and ILW Notes are unrated, a substantial
portion of the Fund’s assets will typically be invested in unrated securities
determined by the Adviser to be of comparable quality to below-investment-grade
securities, similar in some respects to high yield corporate bonds. Event-linked
catastrophe bonds, Quota Share Notes and ILW Notes are exposed to catastrophic
insurance risk, whereas high yield bonds are typically exposed to the potential
default of financially distressed issuers. The Fund has no limit as to the
maturity of the securities in which it invests or as to the market
capitalization of the issuer. The Fund may invest in event-linked bonds, Quota
Share Notes, ILW Notes and debt securities of any credit rating, including those
rated below investment grade (commonly referred to as “junk bonds”) or, if
unrated, determined by the Adviser, to be of comparable quality. With respect to
event-linked bonds, the rating, if any, primarily reflects the rating agency’s
calculated probability that a pre‑defined trigger event(s) will occur, as well
as the overall expected loss to the bond principal. In addition to ratings
issued by rating agencies, event-linked bonds are generally issued with an
attachment probability and expected loss percentage determined by an independent
modeler (a “risk model”). A risk model is created based on historical data and
averages as well as scientific and probabilistic analysis and is used to inform
investors and others on the potential impact of a wide variety of catastrophic
events or other specified events that result in physical and/or
4
economic
loss. The Adviser, in selecting investments for the Fund, will generally
consider risk models created by independent third parties, the sponsor of a
reinsurance-related security or a broker. The Adviser may also consider its own
risk models based on comparable prior transactions, quantitative analysis, and
industry knowledge. The event-linked bonds in which the Fund may invest may also
be subordinated or “junior” to more senior securities of the issuer. The
investor in a subordinated security of an issuer is generally entitled to
payment only after other holders of debt in that issuer have been paid.
A
substantial amount of the reinsurance-related securities in which the Fund
intends to invest are structured as variable rate, or floating-rate, debt
securities, which will be secured by the collateral contributed by the Fund and
other investors to the relevant SPVs sponsored by the ceding insurer. The
collateral is typically invested in short-term instruments, such as U.S.
Treasury securities or U.S. Treasury money market funds. The reinsurance-related
securities typically have rates of interest that reflect the returns of such
short-term collateral instruments, plus a premium.
Derivatives.
The Fund may enter into derivatives transactions with respect to any
security or other instrument in which it is permitted to invest or any security,
instrument, index or economic indicator related to such instruments (“reference
instruments”). Derivatives are financial instruments the value of which is
derived from an underlying reference instrument. Derivatives transactions can
involve substantial risk. Derivatives typically allow the Fund to increase or
decrease the level of risk to which it is exposed more quickly and efficiently
than transactions in other types of instruments. The Fund incurs costs in
connection with opening and closing derivatives positions. The Fund may engage
in the derivative transactions set forth below, as well as in other derivative
transactions with substantially similar characteristics and risks. The Fund may
but is not required to use futures and options on securities, indices and
currencies, forward foreign currency exchange contracts, stock index futures,
swaps, including event-linked swaps and other derivative instruments. The Fund
may use derivatives for a variety of purposes, including (i) as a hedge
against adverse changes in the market prices of securities, interest rates or,
to a lesser extent, currency exchange rates, (ii) as a substitute for
purchasing or selling securities, (iii) to seek to increase the Fund’s
return as a non‑hedging strategy that may be considered speculative, or
(iv) to manage portfolio exposures.
Derivative
transactions may give rise to a form of leverage. Leverage may cause the Fund to
be more volatile than if it had not been leveraged, as certain types of leverage
may exaggerate the effect of any increase or decrease in the value of the Fund’s
portfolio securities. The loss on leverage transactions may substantially exceed
the initial investment.
Foreign Investments. The Fund may invest
without limit in foreign government and foreign corporate debt securities.
Because the majority of reinsurance-related security issuers are domiciled
outside the United States, the Fund will normally invest significant amounts of
its assets in foreign entities. Foreign issuers are issuers that are organized
and/or have their principal offices outside of the United States. Foreign
securities may be issued by foreign governments, banks or corporations, private
issuers, or certain supranational organizations, such as the World Bank and the
European Union. Economic or other sanctions imposed on a foreign country or
issuer by the U.S., or on the U.S. by a foreign country, could impair the Fund’s
ability to buy, sell, hold, receive, deliver, or otherwise transact in certain
securities. Sanctions could also affect the value and/or liquidity of a foreign
security. The Public Company Accounting Oversight Board, which regulates
auditors of U.S. public companies, is unable to inspect audit work papers in
certain foreign countries. Investors in foreign countries often have limited
rights and few practical remedies to pursue shareholder claims, including class
actions or fraud claims, and the ability of the U.S. Securities and Exchange
Commission, the U.S. Department of Justice and other authorities to bring and
enforce actions against foreign issuers or foreign persons is limited.
U.S. Government Securities. The Fund may invest in U.S. government
securities, which are obligations of, or guaranteed by, the U.S. government, its
agencies or government-sponsored entities. U.S. government securities include
issues by non‑governmental entities (like financial institutions) that carry
direct guarantees from U.S. government agencies as part of government
initiatives. Although the U.S. government guarantees principal and interest
payments on securities issued by the U.S. government and some of its agencies,
such as securities issued
5
by
the Government National Mortgage Association (Ginnie Mae), this guarantee does
not apply to losses resulting from declines in the market value of these
securities. Some of the U.S. government securities that the Fund may hold are
not guaranteed or backed by the full faith and credit of the U.S. government,
such as those issued by Fannie Mae and Freddie Mac.
Equity Securities. Equity securities include
common stocks, warrants and rights, as well as “equity equivalents” such as
preferred stocks and securities convertible into common stock. The equity
securities in which the Fund invests may be publicly or privately offered.
Preferred stocks generally pay a dividend and rank ahead of common stocks
and behind debt securities in claims for dividends and for assets of the issuer
in a liquidation or bankruptcy. The dividend rate of preferred stocks may
cause their prices to behave more like those of debt securities. A convertible
security is one that can be converted into or exchanged for common stock of
an issuer within a particular period of time at a specified price, upon the
occurrence of certain events or according to a price formula. Convertible
securities offer the Fund the ability to participate in equity market movements
while also seeking some current income. Convertible debt securities pay interest
and convertible preferred stocks pay dividends until they mature or are
converted, exchanged or redeemed. The Fund considers some convertible securities
to be “equity equivalents” because they are convertible into common stock. The
credit ratings of those convertible securities generally have less impact on the
investment decision, although they may still be subject to credit and interest
rate risk.
Borrowing and Leverage. The Fund may obtain
leverage through borrowings in seeking to achieve its investment objective. The
Fund’s borrowings, which would typically be in the form of loans from banks, may
be on a secured or unsecured basis and at fixed or variable rates of interest.
The 1940 Act requires the Fund to maintain continuous asset coverage of not less
than 300% with respect to all borrowings. This means that the value of the
Fund’s total indebtedness may not exceed one‑third of the value of its total
assets (including such indebtedness). The Fund also may borrow money from banks
or other lenders for temporary purposes in an amount not to exceed 5% of the
Fund’s assets. Such temporary borrowings are not subject to the asset coverage
requirements discussed above. Borrowing money involves transaction and interest
costs. The Fund may pay a commitment fee or other fees to maintain a line of
credit, and will pay interest on amounts it borrows.
Leverage
can have the effect of magnifying the Fund’s exposure to changes in the value of
its assets and may also result in increased volatility in the Fund’s net asset
value (“NAV”). This means the Fund will have the potential for greater gains, as
well as the potential for greater losses, than if the Fund owned its assets on
an unleveraged basis. The value of an investment in the Fund will be more
volatile and other risks tend to be compounded if and to the extent that the
Fund is exposed to leverage.
Reverse Repurchase Agreements. The Fund enters into reverse repurchase
agreements pursuant to which the Fund transfers securities to a counterparty in
return for cash and agrees to repurchase the securities at a later date and for
a higher price. Reverse repurchase agreements are treated as borrowings by the
Fund, are a form of leverage and may make the value of an investment in the Fund
more volatile and increase the risks of investing in the Fund. Entering into
reverse repurchase agreements and other borrowing transactions may cause the
Fund to liquidate positions at a disadvantageous time or price in order to
satisfy its obligations. Under Rule 18f‑4 of the 1940 Act, the Fund has the
option to either treat reverse repurchase agreements as (1) senior
securities under Section 18 of the 1940 Act, in which case they would be
subject to the 300% asset coverage requirement described in this Prospectus or
(2) derivatives subject to the VaR test imposed by Rule 18f‑4. As of the
date of this prospectus, the Fund has elected to treat reverse repurchase
agreements and other similar financing transactions as senior securities. See
“Derivatives Risk” below.
Cash Management and Temporary Investments. Normally, the Fund invests substantially all
of its assets to meet its investment objective. The Fund may invest the
remainder of its assets in securities with remaining maturities of less than one
year or cash equivalents, or may hold cash. For temporary defensive purposes,
including during periods of unusual cash flows, the Fund may depart from its
principal investment strategies and invest part or all of its assets in these
securities or may hold cash. The Fund may adopt a defensive strategy when
6
the
Adviser believes securities in which the Fund normally invests have special or
unusual risks or are less attractive due to adverse market, economic, political
or other conditions.
Additional
Investment Practices
In
addition to the investment strategies described above, the Fund may also use
other investment techniques, including the following from time to time.
Short-Term Trading. At times, the Fund may engage in short-term
trading, usually with respect to certain derivative instruments on the types of
instruments the Fund is permitted to hold in its portfolio. If the Fund engages
in frequent short-term trading, it may incur additional operating expenses,
which would reduce performance, and could cause shareholders to incur a higher
level of taxable income or capital gains.
Securities Lending. The Fund may earn
additional income from lending securities. The value of securities loaned may
not exceed 331⁄3% of the value of the Fund’s total assets,
which includes the value of collateral received. To the extent the Fund loans a
portion of its securities, the Fund will generally receive collateral consisting
of cash or U.S. government securities. Collateral received will be marked to
market daily and will generally be at least equal at all times to the value of
the securities on loan. Subject to its stated investment policies, the Fund will
generally invest cash collateral received for the loaned securities in
securities of the U.S. government or its agencies, repurchase agreements
collateralized by securities of the U.S. government or its agencies, and
unaffiliated registered and unregistered money market funds. For purposes of
this paragraph, agencies include both agency debentures and agency mortgage
backed securities.
Investments in Other Investment Companies. The
Fund may invest in the securities of other investment companies, which can
include open‑end funds, closed‑end funds, unit investment trusts and business
development companies. The Fund may invest in exchange-traded funds (ETFs),
which are typically open‑end funds or unit investment trusts listed on a stock
exchange. One reason the Fund might do so is to gain exposure to segments of the
markets represented by another fund at times when the Fund might not be able to
buy the particular type of securities directly. As a shareholder of an
investment company, the Fund would be subject to its ratable share of that
investment company’s expenses, including its advisory and administration
expenses. The Fund does not intend to invest in other investment companies
unless the Adviser believes that the potential benefits of the investment
justify the payment of any premiums or sales charges. Absent Commission
exemptive or similar relief, the Fund’s investments in the securities of other
investment companies are subject to the limits that apply to those types of
investments under the 1940 Act.
Corporate Debt Obligations. The Fund may purchase debt obligations, such
as bonds, debentures, notes and preferred stock issued by U.S. and foreign
corporations, partnerships or other business entities. Debt securities purchased
by the Fund may be subordinate to other liabilities of the issuer. If a borrower
becomes insolvent, the borrower’s assets may be insufficient to meet its
obligations.
More Information Regarding the Risks of Investing
Before investing or allocating shares of the Fund to
a client’s account, investors should carefully consider the Fund’s risks and
investment objective, as an investment in the Fund may not be appropriate for
all investors or clients and is not designed to be a complete investment
program. 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.” It is possible that investing in the Fund may result in
a loss of some or all of the amount invested. Before making an
investment/allocation decision, investors should (i) consider the
suitability of this investment with respect to an investor’s or a client’s
investment objectives and individual situation and (ii) consider factors
such as an investor’s or a client’s net worth, income, age, and risk tolerance.
Investment should be avoided where an investor/client has a short-term investing
horizon and/or cannot bear the loss of some or all of the investment.
7
The
Fund is subject to the principal risks described below. As with any mutual fund,
there is no guarantee that the Fund will achieve its investment objective. You
could lose all or part of your investment in the Fund, and the Fund could
underperform other investments.
Reinsurance-Related Securities Risk. The principal risk of an investment in a
reinsurance-related security is that a triggering event(s) (e.g., (i) natural events, such as a hurricane,
tornado or earthquake of a particular size/magnitude in a designated geographic
area; or (ii) non‑natural events, such as large aviation disasters) will
occur, and as a result, the Fund will lose all or a significant portion of the
principal it has invested in the security and the right to additional interest
payments with respect to the security. If multiple triggering events occur that
impact a significant portion of the portfolio of the Fund, the Fund could suffer
substantial losses and an investor will lose money. A majority of the Fund’s
assets will be invested in reinsurance-related securities tied to natural events
and/or non‑natural disasters and there is inherent uncertainty as to whether,
when or where such events will occur. There is no way to accurately predict
whether a triggering event will occur and, because of this significant
uncertainty, reinsurance-related securities carry a high degree of risk.
Event-Linked Bonds. Event-linked or
catastrophe bonds carry large uncertainties and major risk exposures to adverse
conditions. If a trigger event, as defined within the terms of the bond,
involves losses or other metrics exceeding a specific magnitude in the
geographic region and time period specified therein, the Fund may lose a portion
or all of its investment in such security, including accrued interest and/or
principal invested in such security. Such losses may be substantial. Because
catastrophe bonds cover “catastrophic” events that, if they occur, will result
in significant losses, catastrophe bonds carry a high degree of risk of loss and
are considered “high yield” or “junk bonds.” The rating, if any, primarily
reflects the rating agency’s calculated probability that a pre‑defined trigger
event will occur. Thus, lower-rated bonds have a greater likelihood of a
triggering event occurring and loss to the Fund.
Catastrophe
bonds are also subject to extension risk. The sponsor of such an investment
might have the right to extend the maturity of the bond or note to verify that
the trigger event did occur or to process and audit insurance claims. The
typical duration of mandatory and optional extensions of maturity for
reinsurance-related securities currently is between three months to two years.
In certain circumstances, the extension may exceed two years. An extension to
verify the potential occurrence of a trigger event will reduce the value of the
bond or note due to the uncertainty of the occurrence of the trigger event and
will hinder the Fund’s ability to sell the bond or note. Even if it is
determined that the trigger event did not occur, such an extension will delay
the Fund’s receipt of the bond’s or note’s principal and prevent the
reinvestment of such proceeds in other, potentially higher yielding securities.
Quota Share Notes and ILW Notes. The Fund may
gain exposure to reinsurance contracts through Quota Share Notes and ILW Notes.
These securities are subject to the same risks discussed herein for event-linked
or catastrophe bonds. In addition, because Quota Share Notes and ILW Notes
represent an interest, either proportional or non‑proportional, in one or more
underlying reinsurance contracts, the Fund has limited transparency into the
individual underlying contract(s) and, therefore, must rely upon the risk
assessment and sound underwriting practices of the sponsor. Accordingly, it may
be more difficult for the Adviser to fully evaluate the underlying risk profile
of the Fund’s investment in Quota Share Notes and ILW Notes, which will place
the Fund’s assets at greater risk of loss than if the Adviser had more complete
information. The lack of transparency may also make the valuation of Quota Share
Notes and ILW Notes more difficult and potentially result in mispricing that
could result in losses to the Fund. See “Illiquidity and Restricted Securities
Risk” and “Valuation Risk” below. In Quota Share Notes trades and ILW Notes
trades, the Fund cannot lose more than the amount invested.
Risk-Modeling Risk. The Adviser, in selecting
investments for the Fund, will generally consider risk models created by
independent third parties, the sponsor of a reinsurance-related security or a
broker. The Adviser may also consider its own risk models based on comparable
prior transactions, quantitative analysis, and industry knowledge. Risk models
are designed to assist investors, governments, and businesses understand the
potential impact of a wide variety of catastrophic events and allow such parties
to analyze the probability of loss in regions
8
with
the highest exposure. The Adviser will use the output of the risk models before
and after investment to assist the Adviser in assessing the risk of a particular
reinsurance-related security or a group of such securities. Risk models are
created using historical, scientific and other related data, and they may use
quantitative methods. Because such risk models are based in part upon historical
data and averages, there is no guarantee that such information will accurately
predict the future occurrence, location or severity of any particular
catastrophic event and thus may fail to accurately calculate the probability of
a trigger event and may underestimate the likelihood of a trigger event.
Securities or other investments selected using quantitative methods may perform
differently from the market as a whole or from their expected performance for
many reasons, including factors used in building the quantitative analytical
framework, the weights placed on each factor, and changing sources of market
returns, among others. In addition, any errors or imperfections in a risk model
(quantitative or otherwise), analyses, the data on which they are based or any
technical issues with the construction of the models (including, for example,
data problems and/or software or other implementation issues) could adversely
affect the ability of the Adviser to use such analyses or models effectively,
which in turn could adversely affect the Fund’s performance. Risk models are
used by the Adviser as one input in its risk analysis process for Fund
investments. There can be no assurance that these methodologies will help the
Fund to achieve its investment objective.
Illiquidity and Restricted Securities Risk.
Illiquidity risk is the risk that the investments held by the Fund may be
difficult or impossible to sell at the time that the Fund would like without
significantly changing the market value of the investment. As a relatively new
type of financial instrument, there is limited trading history for
reinsurance-related securities, even for those securities deemed to be liquid.
The
Fund may invest at the time of purchase up to 15% of its net assets in
securities that are illiquid. The Adviser believes a sufficient liquid market
exists for reinsurance-related securities in order to meet these requirements.
However, there can be no assurance that a liquid market for the Fund’s
investments will be maintained. The Fund’s ability to realize full value in the
event of the need to liquidate certain assets may be impaired and/or result in
losses to the Fund. The Fund may be unable to sell its investments, even under
circumstances when the Adviser believes it would be in the best interests of the
Fund to do so. Illiquid investments may also be difficult to value and their
pricing may be more volatile than more liquid investments, which could adversely
affect the price at which the Fund is able to sell such instruments. Illiquid
investments may involve greater risk than liquid investments. Illiquidity risk
also may be greater in times of financial stress. The risks associated with
illiquid instruments may be particularly acute in situations in which the Fund’s
operations require cash (such as in connection with redemptions) and could
result in the Fund borrowing to meet its short-term needs or incurring losses on
the sale of illiquid instruments.
Certain
of the instruments in which the Fund may invest are subject to restrictions on
resale by the federal securities laws or otherwise, such as securities offered
privately pursuant to Section 4(a)(2) of the 1933 Act and securities issued
pursuant to Rule 144A under the 1933 Act. While certain restricted securities
may, notwithstanding their limitations on resale, be treated as liquid if the
Adviser determines, pursuant to the applicable procedures, that such treatment
is warranted, there can be no guarantee that any such determination will
continue. Restricted securities previously determined to be liquid may
subsequently become illiquid while held by the Fund. Even if such restricted
securities are not deemed to be illiquid, they may nevertheless be difficult to
value and the Fund may be required to hold restricted securities when it
otherwise would sell such securities or may be forced to sell securities at a
price lower than the price the Fund has valued such securities, and the Fund may
incur additional expense when disposing of restricted securities, including
costs to register the sale of the securities. This may result in losses to the
Fund and investors.
Valuation Risk. The Fund is subject to
valuation risk, which is the risk that one or more of the securities in which
the Fund invests are priced incorrectly, due to factors such as incomplete data,
market instability, or human error. In addition, pricing of reinsurance-related
securities is subject to the added uncertainty caused by the inability to
generally predict whether, when or where a natural disaster or other triggering
event will occur. Even after a natural disaster or other triggering event
occurs, the pricing of reinsurance-related securities is subject to uncertainty
for a period of time until event parameters, ultimate loss amounts and other
factors are finalized and communicated to the Fund. The Fund’s investments in
reinsurance-related securities for which market quotations
9
are
not available will be valued pursuant to procedures adopted by the Board. Even
for reinsurance-related securities for which market quotations are generally
readily available, upon the occurrence or possible occurrence of a trigger
event, and until the completion of the settlement and auditing of applicable
loss claims, the Fund’s investment in a reinsurance-related security may be
priced using fair value methods. Many of the Fund’s reinsurance-related
securities are priced using fair value methods. Portfolio securities that are
valued using techniques other than market quotations, including fair valued
securities, may be subject to greater fluctuation in their value from one day to
the next than would be the case if market quotations were used. There is no
assurance that the Fund could sell a portfolio security for the value
established for it at any time and it is possible that the Fund would incur a
loss because a portfolio security is sold at a discount to its established
value. If securities are mispriced, shareholders could lose money upon
redemption or could pay too much for shares purchased.
Moral Hazard Risk. Reinsurance-related
securities are generally subject to one or more types of triggers, including
so‑called “indemnity-triggers.” An indemnity trigger is a trigger based on the
actual losses of the ceding sponsor (i.e., the party seeking reinsurance).
Reinsurance-related securities subject to indemnity triggers are often regarded
as being subject to potential moral hazard, since such reinsurance-related
securities are triggered by actual losses of the ceding sponsor and the ceding
sponsor may have an incentive to take actions and/or risks that would have an
adverse effect on the Fund. For example, if an event-linked bond issued will be
triggered at $500 million in losses to the sponsor, once that trigger is
hit (i.e., the sponsor experiences $500 million in losses under the
contracts it has written), the bond purchaser will lose all or a portion of its
principal invested (plus any additional interest). In this situation, the ceding
sponsor has an incentive to pay the claims more generously when the loss amount
is near the trigger amount set in the bond (i.e., to claim $500 million in
losses, when perhaps it could be argued that actual losses were $499.9 million).
Thus, bonds with indemnity triggers may be subject to moral hazard, because the
trigger depends on the ceding sponsor to properly identify and calculate losses
that do and do not apply in determining whether the trigger amount has been
reached. In short, “moral hazard” refers to this potential for the sponsor to
influence bond performance, as payouts are based on the individual policy claims
against the sponsor and the way the sponsor settles those claims.
Limited Availability and Reinvestment
Risk. Investments in
reinsurance-related securities may be limited, which may limit the amount of
assets the Fund may be able to invest in reinsurance-related securities. The
limited availability of reinsurance-related securities may be due to a number of
factors, including seasonal concentration of issuances, limited selection that
meets the Fund’s investment objective and lack of availability of
reinsurance-related securities in the secondary market. Original issuances of
event-linked bonds (and in particular hurricane-related catastrophe bonds) may
be concentrated in the first two calendar quarters of each year while original
issuances of Quota Share Notes may be concentrated in particular reinsurance
renewal months (January, and to a lesser extent, April, June, and July).
Thereafter, the availability of reinsurance-related securities is subject to
natural fluctuations in the secondary market. Therefore, if reinsurance-related
securities held by the Fund mature or if the Fund must sell securities to meet
redemption requests, the Fund may be required to hold more cash than it normally
would until reinsurance-related securities meeting the Fund’s investment
objective become available. Due to the potentially limited availability of
additional reinsurance-related securities, the Fund may be forced to reinvest in
securities that are lower yielding or less desirable than the securities the
Fund sold. This is known as reinvestment risk, and may reduce the overall return
on its portfolio securities.
Investments in Non‑Voting Securities Risk. If
the reinsurance-related securities in which the Fund invests carry voting
rights, the Fund ordinarily will limit such investments to 5% or less of the
issuing SPV’s outstanding voting securities. However, to enable the Fund to
invest more of its assets in certain SPVs deemed attractive by the Adviser, the
Fund may also contractually forego its right to vote securities or may purchase
non‑voting securities of such SPVs. If the Fund does not limit its voting rights
and is deemed an “affiliate” of the SPV, the ability of the Fund to make future
investments in the SPV or to engage in other transactions would be severely
limited by the requirements of the 1940 Act. Such limitations may interfere with
portfolio management of the Fund, which may adversely impact the Fund’s
performance.
10
For
various reasons, the Fund may hold some or all of its interest in an SPV in
non‑voting form. One reason for this is to avoid an SPV being deemed an
“affiliated person” of the Fund for purposes of the 1940 Act. Accordingly, the
Fund may agree to waive irrevocably any right that the Fund may have to vote
securities in amounts in excess of 4.99% of an SPV’s outstanding voting
securities. The general policy to waive voting rights has been reviewed by the
Board. The waiver of the Fund’s voting rights does not facilitate investments in
an SPV by the Adviser or other clients of the Adviser, either as a practical or
a legal matter, and is not intended to confer any benefit on such entities.
Interests in a particular SPV, even without voting rights, are selected based on
the investment merits of those interests consistent with the fiduciary duties of
both the Adviser and the Board, and generally reflect the judgment of the
Adviser that such investments are an attractive and appropriate opportunity for
the Fund for any number of reasons.
To
the extent the Fund holds non‑voting securities of an SPV, or contractually
foregoes its right to vote securities of an SPV, it will not be able to vote to
the full extent of its economic interest on matters that require the approval of
the investors in the SPV, including matters that could adversely affect the
Fund’s investment in the SPV. This restriction could diminish the influence of
the Fund in an SPV and adversely affect its investment in the SPV, which could
result in unpredictable and potentially adverse effects on shareholders.
Moreover, there is a risk that a court or securities regulators could disregard
the statutory definition of “affiliated person,” and still treat the SPV as an
affiliated person of the Fund for purposes of the 1940 Act.
Reinsurance Industry Risk. The performance of
reinsurance-related securities and the reinsurance industry itself are tied to
the occurrence of various triggering events, including weather, natural
disasters (hurricanes, earthquakes, etc.), non‑natural large catastrophes and
other specified events causing physical and/or economic loss. Triggering events
are typically defined by three criteria: an event; a geographic area in which
the event must occur; and a threshold of economic or physical loss (either
actual or modeled) caused by the event, together with a method to measure such
loss. Generally, the event is either a natural or non‑natural peril of a kind
that results in significant physical or economic loss. Natural perils include
disasters such as hurricanes, earthquakes, windstorms, pandemics, epidemics,
fires and floods. Non‑natural perils include disasters resulting from human
activity, such as commercial and industrial accidents or business interruptions.
Major natural disasters in populated areas (such as in the cases of Hurricane
Katrina in New Orleans in 2005, Superstorm Sandy in the New York City
metropolitan area in 2012 and Hurricane Irma in Florida and the Caribbean in
2017) or related to high-value insured property (such as plane crashes) can
result in significant losses and investors in reinsurance-related securities
tied to such exposures may also experience substantial losses. If the likelihood
and severity of natural and other large disasters increase, the risk of
significant losses to reinsurers may increase. Typically, one significant
triggering event (even in a major metropolitan area) will not result in
financial failure to a reinsurer. However, a series of major triggering events
could cause the failure of a reinsurer. Similarly, to the extent the Fund
invests in reinsurance-related securities for which a triggering event occurs,
losses associated with such event will result in losses to the Fund and a series
of major triggering events affecting a large portion of the reinsurance-related
securities held by the Fund will result in substantial losses to the Fund. In
addition, unexpected events such as natural disasters or terrorist attacks could
lead to government intervention. Political, judicial and legal developments
affecting the reinsurance industry could also create new and expanded theories
of liability or regulatory or other requirements; such changes could have a
material adverse effect on the Fund.
Floating-Rate Instrument Risks. A significant
percentage of the reinsurance-related securities in which the Fund invests are
variable rate, or floating-rate, event-linked bonds. Floating-rate instruments
and similar investments may be illiquid or less liquid than other investments.
In addition, while the collateral securing most event-linked bonds in which the
Fund currently intends to invest is typically invested in low‑risk investments,
certain SPVs in which the Fund invests may permit investment of collateral in
higher risk, higher yielding investments. Thus, the value of collateral, if any,
securing the Fund’s investments in event-linked bonds can decline or may be
insufficient to meet the issuer’s obligations and the collateral, if repaid to
the Fund, may be difficult to liquidate. Market quotations for these securities
may be volatile and/or subject to large spreads between bid and ask prices.
11
Below-Investment-Grade Securities and Unrated
Securities Risk. The Fund has exposure and may, without limitation,
continue to have exposure to reinsurance-related securities that are rated below
investment grade or that are unrated but are judged by the Adviser to be of
comparable quality. Below-investment-grade debt securities, which are commonly
called “junk bonds,” are rated below BBB‑ by S&P Global Ratings or Baa3 by
Moody’s Investors Service, Inc., or have comparable ratings by another rating
organization. Accordingly, certain of the Fund’s unrated investments could
constitute a highly risky and speculative investment, similar to an investment
in “junk bonds.”
The
rating primarily reflects the rating agency’s calculated probability that a
pre‑defined trigger event will occur. Therefore, securities with a lower rating
reflect the rating agency’s assessment of the substantial risk that a triggering
event will occur and result in a loss. The rating also reflects the
reinsurance-related security’s credit risk and the model used to calculate the
probability of the trigger event. The rating system for reinsurance-related
securities is relatively new and significantly less developed than that of
corporate bonds and continues to evolve as the market develops. There is no
minimum rating on the instruments in which the Fund may invest. Most rating
agencies rely upon one or more of the reports prepared by the following three
independent catastrophe-modeling firms: EQECAT, Inc., AIR Worldwide Corporation
and Risk Management Solutions, Inc. The Adviser may also rely on reports from
one or more of these modeling firms as part of its investment process or may
create its own internal risk model for this purpose. Different methodologies are
used to evaluate the probability of various types of pre‑defined trigger events.
If the reports used by the rating agency are flawed, it may cause a rating
agency to assign a rating to a reinsurance-related security that is not
justified. Therefore, to the extent the Adviser relies on rating agency ratings
to select securities for the Fund, the Fund may be exposed to greater risks.
Additionally, because there are few major independent catastrophe-modeling
firms, the effects of a flawed model or report issued by one or more of such
firms will be magnified. In addition, such investments may be subject to greater
risks than other investments, including greater levels of risk related to
changes in interest rates, credit risk (including a greater risk of default),
and illiquidity risk. Below-investment-grade investments or unrated investments
judged by the Adviser to be of comparable quality may be more susceptible to
real or perceived adverse economic and competitive industry or business
conditions than higher-grade investments. Yields on below-investment-grade
investments will fluctuate and may, therefore, cause the Fund’s value to be more
volatile. Certain investments of the Fund may be downgraded to
below-investment-grade status (or may be judged by the Adviser to be of
comparable quality) after the Fund purchases them.
Borrowing and Leverage Risk. The Fund has
obtained financing to make investments in reinsurance-related securities and may
obtain financing to meet redemption requests and to address cash flow timing
mismatches. Therefore, the Fund is subject to leverage risk. The Fund’s
borrowings, which would typically be in the form of loans from banks or reverse
repurchase agreements, may be on a secured or unsecured basis and at fixed or
variable rates of interest. Leverage magnifies the Fund’s exposure to declines
in the value of one or more underlying reference assets or creates investment
risk with respect to a larger pool of assets than the Fund would otherwise have
and may be considered a speculative technique. This risk is enhanced for the
Fund because it invests substantially all its assets in reinsurance-related
securities. Reinsurance-related securities can quickly lose all or much of their
value if a triggering event occurs. Thus, to the extent assets subject to a
triggering event are leveraged, the losses could substantially outweigh the
Fund’s investment and result in significant losses to the Fund. The value of an
investment in the Fund will be more volatile and other risks tend to be
compounded if and to the extent the Fund borrows or uses derivatives or other
investments that have embedded leverage.
The
Fund’s ability to obtain leverage through borrowings is dependent on its ability
to establish and maintain an appropriate line of credit or other borrowing
facility. Borrowing gives rise to interest expense and may require the Fund to
pay other fees. Unless the rate of return, net of applicable Fund expenses, on
the Fund’s investments exceeds the costs to the Fund of the leverage it
utilizes, the investment of the Fund’s net assets attributable to leverage will
generate less income than will be needed to pay the costs of the leverage to the
Fund, resulting in a loss to the Fund, even if the rate of return on those
assets is positive. To the extent the Fund is able to secure financing,
fluctuations in interest rates could increase the costs associated with the
Fund’s use of certain forms of leverage, and such costs could reduce the Fund’s
return.
12
In
addition to any more stringent terms imposed by a lender, the 1940 Act requires
the Fund to maintain continuous asset coverage of not less than 300% with
respect to all borrowings. To satisfy 1940 Act requirements in connection with
leverage or to meet obligations, the Fund may be required to dispose of
portfolio securities when such disposition might not otherwise be desirable to
maintain continuous asset coverage of not less than 300%. Engaging in such
transactions may cause the Fund to liquidate positions when it may not be
advantageous to do so to satisfy its obligations. There can be no assurance that
the Fund’s use of leverage will be successful.
Derivatives Risk. The Fund may invest in a
variety of derivatives, including options, futures contracts and swaps. The use
of derivatives involves risks that are in addition to, and potentially greater
than, the risks of investing directly in securities and other more traditional
assets. Derivatives are financial contracts the value of which depends on, or is
derived from, an asset or other underlying reference. Derivatives involve the
risk that changes in their value may not move as expected relative to changes in
the value of the underlying reference asset they are designed to track. The Fund
may invest in derivatives for investment purposes and for hedging and risk
management purposes. Derivatives risk may be more significant when derivatives
are used to enhance return or as a substitute for a cash investment option,
rather than solely to hedge the risk of a position held by the Fund. See the
Statement of Additional Information for additional information of the various
types and uses of derivatives in the Fund’s strategy.
The
Fund may be required to provide more margin for its derivative investments
during periods of market disruptions or stress.
Derivatives
also present other risks described herein, including market risk, illiquidity
risk, currency risk, counterparty risk and credit risk. OTC derivatives are
generally highly illiquid. Many derivatives, in particular OTC derivatives, are
complex and their valuation often requires modeling and judgment, which
increases the risk of mispricing or improper valuation. The pricing models used
may not produce valuations that are consistent with the values the Fund realizes
when it closes or sells an OTC derivative. Valuation risk is more pronounced
when the Fund enters into OTC derivatives with specialized terms because the
value of those derivatives in some cases is determined only by reference to
similar derivatives with more standardized terms. As a result, incorrect
valuations may result in increased cash payments to counterparties,
undercollateralization and/or errors in the calculation of the Fund’s NAV.
The
Fund’s use of derivatives may not be effective or have the desired results.
Moreover, suitable derivatives will not be available in all circumstances. The
Adviser may decide not to use derivatives to hedge or otherwise reduce the
Fund’s risk exposures, potentially resulting in losses for the Fund.
Many
derivatives have embedded leverage (i.e., a notional value in excess of the
assets needed to establish and/or maintain the derivative position). Derivatives
in which the Fund may invest (e.g., options, futures and swaps) may have
embedded leverage, depending on their specific terms. As a result, adverse
changes in the value or level of the underlying investment may result in a loss
substantially greater than the amount invested in the derivative itself. See
“Borrowing and Leverage Risk” above.
As
described in this Derivatives Risk section and elsewhere in this prospectus,
government regulation in the U.S. and various other jurisdictions of derivative
instruments may restrict the Fund’s ability to engage in, or increase the cost
to the Fund of derivative transactions, for example, by making some types of
derivatives no longer available to the Fund, increasing margin or capital
requirements, or otherwise limiting liquidity or increasing transaction costs.
18f‑4 provides for the regulation of a registered investment company’s use of
derivatives and certain related instruments. Funds that use derivatives to a
limited extent, such as the Fund, are generally required by Rule 18f‑4 to adopt
policies and procedures reasonably designed to manage the fund’s derivatives
risk. In connection with the adoption of Rule 18f‑4, the Commission also
eliminated the asset segregation framework arising from prior Commission
guidance for covering derivatives and certain financial instruments. As a
result, to the extent the Fund uses derivatives, it will comply with the
relevant requirements of Rule 18f‑4. Rule 18f‑4 restricts the Fund’s ability to
engage in certain derivatives transactions, which could adversely affect the
value or performance of the Fund.
13
The
Fund’s use of derivatives may be subject to special tax rules, which are in some
cases uncertain under current law and could affect the amount, timing and
character of distributions to shareholders. See “Distributions and Federal
Income Tax Matters” below.
Counterparty Risk. The Fund’s use of OTC
derivatives exposes it to the risk that the counterparties will be unable or
unwilling to make timely settlement payments or otherwise honor their
obligations. An OTC derivatives contract typically can be closed only with the
consent of the other party to the contract. Events that affect the ability of
the Fund’s counterparties to comply with the terms of the derivative contracts
may have an adverse effect on the Fund. If the counterparty defaults, the Fund
will still have contractual remedies but may not be able to enforce them. In
addition, in the event of a counterparty bankruptcy, the Fund may experience
significant delays in obtaining any recovery under the derivative contract in a
bankruptcy or other reorganization proceeding or may obtain a limited or no
recovery of amounts due to it under the derivative contract, including the
return of any collateral that has been provided to the counterparty. The Fund
may invest in derivatives with a limited number of counterparties, and events
affecting the creditworthiness of any of those counterparties may have a
pronounced effect on the Fund. Because the contract for each OTC derivative is
individually negotiated, the counterparty may interpret contractual terms
differently than the Fund and, if it does, the Fund may decide not to pursue its
claims against the counterparty to avoid incurring the cost and unpredictability
of legal proceedings. The Fund, therefore, may be unable to obtain payments the
Adviser believes are owed to it under OTC derivatives contracts, or those
payments may be delayed or made only after the Fund has incurred the costs of
litigation.
The
Fund may invest in derivatives that (i) do not require the counterparty to
post collateral (e.g., certain foreign currency forwards), (ii) require a
counterparty to post collateral but do not provide for the Fund’s security
interest in it to be perfected, (iii) require the Fund to post significant
upfront collateral unrelated to the derivative’s fundamental fair (or intrinsic)
value or (iv) do not require that collateral be regularly marked‑to‑market.
When a counterparty’s obligations are not fully secured by a perfected security
interest in collateral, the Fund runs a greater risk of not being able to
recover what it is owed if the counterparty defaults because it is essentially
an unsecured creditor of the counterparty. Even when derivatives are required by
regulation and/or contract to be collateralized, the Fund may not receive the
collateral for one or more days after the collateral is required to be posted by
the counterparty. Also, in the event of a counterparty’s (or its affiliate’s)
insolvency, the possibility exists that the Fund’s ability to exercise remedies,
such as the termination of transactions, netting of obligations and realization
on collateral, could be stayed or eliminated under special resolution regimes
adopted in the United States, the European Union, the United Kingdom and various
other jurisdictions. Such regimes provide government authorities with broad
authority to intervene when a financial institution is experiencing financial
difficulty. In particular, the regulatory authorities could reduce, eliminate,
or convert to equity the liabilities to the Fund of a counterparty who is
subject to such proceedings in the European Union (sometimes referred to as a
“bail in”).
Counterparty
risk is accentuated for contracts with longer maturities where events may
intervene to prevent settlement, or where the Fund has concentrated its
transactions with a single or small group of counterparties. For example, the
creditworthiness of a counterparty may be adversely affected by larger than
average volatility in the markets, even if the counterparty’s net market
exposure is small relative to its capital. The Adviser evaluates the
creditworthiness of the counterparties to the Fund’s transactions or their
guarantors at the time the Fund enters into a transaction; however, the Fund is
not restricted from dealing with any particular counterparty or from
concentrating any or all transactions with one counterparty. In the absence of a
regulated market to facilitate settlement, the potential for losses by the Fund
may be increased. In addition, counterparties to derivatives contracts may have
the right to terminate such contracts in certain circumstances (or in some
cases, at any time for any reason), including if the Fund’s NAV declines below a
certain level over a specified period of time. The exercise of such a right by
the counterparty could have a material adverse effect on the Fund’s operations
and the Fund’s ability to achieve its investment objective.
The
Fund may also be exposed to documentation risk, which is the risk that
ambiguities, inconsistencies or errors in the documentation relating to a
derivative transaction may lead to a dispute with the counterparty or
14
unintended
investment results. Because the contract for each OTC derivative transaction is
individually negotiated, the counterparty may interpret contractual terms (e.g.,
the definition of default) differently than the Fund, and if it does, the Fund
may decide not to pursue its claims against the counterparty to avoid the cost
and unpredictability of legal proceedings. The Fund, therefore, may be unable to
obtain payments the Adviser believes are owed to the Fund under derivative
instruments or those payments may be delayed or made only after the Fund has
incurred the cost of litigation.
Specific
risks involved in the use of certain types of derivatives in which the Fund may
invest include:
Options Risk. A decision as to whether, when
and how to use options involves the exercise of skill and judgment, and even a
well-conceived and well-executed options program may be adversely affected by
market behavior or unexpected events. Successful options strategies may require
the anticipation of future movements in securities prices or other economic
factors of the underlying investments. No assurances can be given that the
Adviser’s judgment in this respect will be correct.
The
market price of written options will be affected by many factors, including
changes in the market price or other economic attributes of the underlying
investment; changes in the realized or perceived volatility of the relevant
market and underlying investment; and the time remaining before an option’s
expiration.
The
ability to trade in or exercise options may be restricted, including in the
event that trading in the underlying reference becomes restricted. Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of OTC
options are generally established through negotiation with the other party to
the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options can be less liquid
than exchange-traded options and generally involve greater counterparty credit
risk than exchange traded options, which are guaranteed by the clearing
organization of the exchanges where they are traded.
The
market price of options, particularly OTC options, may be adversely affected if
the market for the options becomes less liquid or smaller. Typically, an OTC
option can be closed only with the consent of the other party to the contract.
The Fund may close out a written exchange-traded option position by buying the
option instead of letting it expire or be exercised. There can be no assurance
that a liquid market will exist when the Fund seeks to close out an option
position by buying or selling the option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or clearinghouse may not at all times be
adequate to handle current trading volume; or (vi) a regulator or one or
more exchanges could, for economic or other reasons, decide to discontinue the
trading of options (or a particular class or series of options) at some future
date. If trading were discontinued, the secondary market on that exchange (or in
that class or series of options) would cease to exist.
Swaps Risk. The use of swaps involves
investment techniques and risks that are different from those associated with
portfolio security transactions. These instruments are typically not traded on
exchanges and, in such cases, are subject to the risks associated with OTC
derivatives generally. Transactions in some types of swaps (generally not
including equity swaps) are required to be centrally cleared (“cleared swaps”)
and the other swap transactions may be centrally cleared on a voluntary basis.
For OTC swaps, there is a risk that the other party will not perform its
obligations to the Fund or that the Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position when it wishes to
do so. Such occurrences could result in losses to the Fund.
The
Fund may obtain event-linked exposure by investing in, among other things,
event-linked swaps, which typically are contingent, or formulaically related to
defined trigger events, or by pursuing similar event-linked derivative
strategies. Trigger events include hurricanes, earthquakes, weather-related
phenomena and other
15
criteria
determined by independent parties. If a trigger event(s) occurs, the Fund may
lose the swap’s notional amount. As derivative instruments, event-linked swaps
are subject to risks in addition to the risks of investing in
reinsurance-related securities, including risks associated with the counterparty
and leverage.
Epidemic and Pandemic Risk. The impact of
COVID‑19, and other infectious illness outbreaks that may arise in the future,
could adversely affect the economies of many nations or the entire global
economy, individual issuers and capital markets in ways that cannot necessarily
be foreseen. In addition, the impact of infectious illnesses in emerging market
countries may be greater due to generally less established healthcare systems.
Public health crises caused by the COVID‑19 outbreak may exacerbate other
pre‑existing political, social and economic risks in certain countries or
globally. Such impacts present material uncertainty and risk with respect to the
Fund’s investment performance and financial results. The impact of COVID‑19 or
any future public health crisis may also heighten the other risks disclosed in
this prospectus.
Credit Risk.
The reinsurance-related securities in which the Fund invests will be
subject to credit risk. The principal invested in many reinsurance-related
securities is held by the SPV in a collateral account and invested in various
permissible assets set forth under the terms of the SPV. In these cases,
typically, the collateral account is invested in high quality U.S. government
securities (i.e., U.S. Treasury bonds). However, in certain reinsurance-related
securities, the collateral account may be invested in high yielding, higher risk
securities, which may include securities issued by entities managed by the
Adviser. Collateral will generally be invested in accordance with the terms of
the SPV and overseen by a collateral manager appointed by the SPV; therefore,
the Fund is dependent upon the manager to invest the collateral account proceeds
appropriately. A small portion of the reinsurance-related securities in which
the Fund invests may, in lieu of such collateral account arrangements, provide
for the collateral to be held by the reinsurer. When a collateral account is
invested in higher yielding, higher risk securities or when the collateral is
held directly by the reinsurer, the Fund will be subject to the risk of
non‑payment of scheduled principal and interest on such collateral. Such
non‑payments and defaults may reduce the income to the Fund and negatively
impact the value of Fund shares.
Foreign Investing Risk. The Fund may invest in
reinsurance-related securities issued by foreign sovereigns and foreign entities
that are corporations, partnerships, trusts or other types of business entities.
Because the majority of reinsurance-related security issuers are domiciled
outside the United States, the Fund will normally invest significant amounts of
its assets in foreign (non‑U.S.) entities. Accordingly, the Fund may invest
without limitation in securities issued by foreign entities, including those in
emerging market countries. Certain SPVs in which the Fund invests may be
sponsored by foreign insurers that are not subject to the same regulation as
that to which U.S. insurers are subject. Such SPVs may pose a greater risk of
loss, for example, due to less stringent underwriting and/or risk-retention
requirements. The Fund’s investments in event-linked bonds, Quota Share Notes
and ILW Notes provide the Fund with contractual rights under the terms of the
issuance. While the contractual rights of such instruments are similar whether
they are issued by a U.S. issuer or a foreign issuer, there may be certain
additional risks associated with foreign issuers. For example, foreign issuers
could be affected by factors not present in the U.S., including expropriation,
confiscatory taxation, lack of uniform accounting and auditing standards, less
publicly available financial and other information, potential difficulties in
enforcing contractual obligations, and increased costs to enforce applicable
contractual obligations outside the U.S. Fluctuations in foreign currency
exchange rates and exchange controls may adversely affect the market value of
the Fund’s investments in foreign securities. See “Currency Risk” below.
Settlements of securities transactions in foreign countries are subject to risk
of loss, may be delayed and are generally less frequent than in the U.S., which
could affect the liquidity of the Fund’s assets.
Currency Risk. The Fund’s shares are priced in
U.S. dollars and the distributions paid by the Fund are paid in U.S. dollars,
and it is expected that a substantial portion of the Fund’s direct or indirect
investments in reinsurance-related securities will be U.S. dollar denominated
investments. However, a portion of the Fund’s assets may be denominated in
foreign (non‑U.S.) currencies and income received by the Fund from a portion of
its investments may be paid in foreign currencies, and to the extent the Fund
invests in non‑U.S. dollar denominated instruments, a change in the value of a
foreign currency against the U.S. dollar will result in a change in the U.S.
dollar value of securities denominated in that foreign currency. If the U.S.
dollar rises in value
16
against
a foreign currency, a security denominated in that currency will be worth less
in U.S. dollars and if the U.S. dollar decreases in value against a foreign
currency, a security denominated in that currency will be worth more in U.S.
dollars. Currency risk also includes the risk that a currency to which the Fund
has obtained exposure through hedging declines in value relative to the currency
being hedged, in which event the Fund may realize a loss both on the hedging
instrument and on the currency being hedged. There can be no assurances or
guarantees that any efforts the Fund makes to hedge exposure to foreign exchange
rate risks that arise as a result of its investments will successfully hedge
against such risks or that adequate hedging arrangements will be available on an
economically viable basis, and in some cases, hedging arrangements may result in
additional costs being incurred or losses being greater than if hedging had not
been used. Currency exchange rates can fluctuate significantly for many reasons.
Derivative transactions in foreign currencies (such as futures, forwards,
options and swaps) may involve leverage risk in addition to currency risk. Some
countries have and may continue to adopt internal economic policies that affect
their currency valuations in a manner that may be disadvantageous for U.S.
investors or U.S. companies seeking to do business in those countries. For
example, a foreign government may unilaterally devalue its currency against
other currencies, which typically would have the effect of reducing the U.S.
dollar value of investments denominated in that currency. In addition, a country
may impose formal or informal currency exchange controls. These controls may
restrict or prohibit the Fund’s ability to repatriate both investment capital
and income, which could undermine the value and liquidity of the Fund’s
portfolio holdings and potentially place the Fund’s assets at risk of total
loss. As a result, if the exchange rate for any such currency declines after the
Fund’s income has been earned and converted into U.S. dollars but before payment
to shareholders, the Fund could be required to liquidate portfolio investments
to make such distributions. Similarly, if the Fund incurs an expense in U.S.
dollars and the exchange rate declines before the expense is paid, the Fund
would have to convert a greater amount to U.S. dollars to pay for the expense at
that time than it would have had to convert at the time the Fund incurred the
expense.
Equity Investing Risk. The Fund may at times
invest in equity securities, which may be publicly or privately offered. The
equity securities in which the Fund invests may be more volatile than the equity
markets as a whole. Equity investing risk is the risk that the value of equity
instruments to which the Fund is exposed will fall due to general market or
economic conditions; overall market changes; local, regional or global
political, social or economic instability; currency, interest rate and commodity
price fluctuations; perceptions regarding the industries in which the issuers
participate, and the particular circumstances and performance of the issuers.
Market conditions may affect certain types of equity securities to a greater
extent than other types. Although equities have historically generated higher
average returns than debt securities over the long term, equity securities also
have experienced significantly more volatility in returns. Equities to which the
Fund will be exposed are structurally subordinated to bonds and other debt
instruments in a company’s capital structure, in terms of priority to corporate
income, and, therefore, will be subject to greater dividend risk than debt
instruments of such issuers. Finally, the prices of equities are also sensitive
to rising interest rates, as the costs of capital rise and borrowing costs
increase.
Preferred Securities Risk. Preferred
securities may pay fixed or adjustable rates of return. Preferred securities are
subject to issuer-specific and market risks applicable generally to equity
securities. In addition, preferred securities generally pay a dividend and rank
ahead of common stocks and behind debt securities in claims for dividends and
for assets of the issuer in a liquidation or bankruptcy. For this reason, the
value of preferred securities will usually react more strongly than bonds and
other debt to actual or perceived changes in the company’s financial condition
or prospects. Preferred securities may also be sensitive to changes in interest
rates. When interest rates rise, the fixed dividend on preferred securities may
be less attractive, causing the price of preferred stocks to decline. Preferred
securities of smaller companies may be more vulnerable to adverse developments
than preferred stock of larger companies.
Market Risk. The value of the Fund’s
investments may decline, sometimes rapidly or unpredictably, due to general
economic conditions that are not specifically related to a particular issuer,
such as real or perceived adverse economic or political conditions throughout
the world, changes in interest or currency rates or adverse investor sentiment
generally. The value of the Fund’s investments also may decline because of
factors that affect
17
a
particular industry or industries. For example, the financial crisis that began
in 2008 caused a significant decline in the value and liquidity of many
securities, and current market factors such as military conflicts abroad, global
supply chain issues and inflation could negatively impact Fund performance.
Management and Operational Risk; Cyber-Security
Risk. The Fund is subject to management risk because it relies on the
Adviser’s ability to achieve its investment objective. The Fund runs the risk
that the Adviser’s investment techniques will fail to produce desired results
and cause the Fund to incur significant losses. The Adviser may select
investments that do not perform as anticipated by the Adviser, may choose to
hedge or not to hedge positions at disadvantageous times and may fail to use
derivatives effectively.
Any
imperfections, errors, or limitations in quantitative analyses and models used
by the Adviser as part of its investment process could affect the Fund’s
performance. Models that appear to explain prior market data can fail to predict
future market events. Further, the data used in models may be inaccurate or may
not include the most recent information about a company or a security.
The
Fund also is subject to the risk of loss as a result of other services provided
by the Adviser and other service providers, including pricing, administrative,
accounting, tax, legal, custody, transfer agency and other services. Operational
risk includes the possibility of loss caused by inadequate procedures and
controls, human error and cyber attacks, disruptions, and failures affecting, or
by, a service provider. For example, trading delays or errors (both human and
systematic) could prevent the Fund from benefiting from potential investment
gains or avoiding losses.
The
Fund and its service providers’ use of internet, technology and information
systems may expose the Fund to potential risks linked to cyber-security breaches
of those technological or information systems. Cyber-security breaches could
allow unauthorized parties to gain access to proprietary information, customer
data or Fund assets, or cause the Fund or its service providers to suffer data
corruption or lose operational functionality. With the increased use of
technology, mobile devices and cloud-based service offerings and the dependence
on the internet and computer systems to perform necessary business functions,
investment companies (such as the Fund) and their service providers (including
the Adviser) may be prone to operational and information security risks
resulting from cyber attacks and/or other technological malfunctions. In
general, cyber attacks are deliberate, but unintentional events may have similar
effects. Cyber attacks include, among others, stealing or corrupting data
maintained online or digitally, preventing legitimate users from accessing
information or services on a website, ransomware, releasing confidential
information without authorization, and causing operational disruption.
Successful cyber attacks against, or security breakdowns of, the Fund, the
Adviser, or the custodian, Transfer Agent, or other third-party service provider
may adversely affect the Fund or its shareholders. For instance, cyber attacks
may interfere with the processing of shareholder transactions, interfere with
quantitative models, affect the Fund’s ability to calculate its NAV, cause the
release of private shareholder information or confidential Fund information,
impede trading, cause reputational damage, result in theft of Fund assets, and
subject the Fund to regulatory fines, penalties or financial losses,
reimbursement or other compensation costs, and additional compliance costs.
Similar types of cyber-security risks are also present for issuers of securities
in which the Fund invests or such issuers’ counterparties, which could result in
material adverse consequences for such issuers and could cause the Fund’s
investment in such securities to lose value. While the Adviser has established
business continuity plans and systems that it believes are reasonably designed
to prevent cyber attacks, there are inherent limitations in such plans and
systems including the possibility that certain risks have not been, or cannot
be, identified. Service providers may have limited indemnification obligations
to the Adviser or the Fund, each of whom could be negatively impacted as a
result.
Redemption Risk. The Fund may need to sell
portfolio securities to meet redemption requests. Under certain circumstances,
the Fund could experience a loss when selling portfolio securities to meet
redemption requests, including in the event of (i) significant redemption
activity by shareholders, including when a single investor (such as the Stone
Ridge Diversified Alternatives Fund) or a few large investors make a significant
redemption of Fund shares, (ii) a disruption in the normal operation of the
markets in which the Fund buys and sells portfolio securities or (iii) the
Fund’s inability to sell certain portfolio securities because such securities
are illiquid. In
18
such
circumstances, the Fund could be forced to sell portfolio securities at
unfavorable prices in an effort to generate sufficient cash to pay redeeming
shareholders. The Fund may suspend redemptions or the payment of redemption
proceeds when permitted by applicable regulations.
Tax Risk. The Fund currently intends to qualify
for treatment as a regulated investment company (“RIC”) under Subchapter M of
Chapter 1 of the Internal Revenue Code of 1986, as amended (the “Code”). In
order to qualify for such treatment, the Fund must derive at least 90% of its
gross income each taxable year from qualifying income, meet certain asset
diversification tests at the end of each fiscal quarter, and distribute at least
90% of its investment company taxable income for each taxable year. The
Fund’s investment strategy will potentially be limited by its intention to
qualify for treatment as a RIC. The tax treatment of certain of the Fund’s
investments under one or more of the qualification or distribution tests
applicable to RICs is not certain. An adverse determination or future guidance
by the IRS or a change in law might affect the Fund’s ability to qualify for
such treatment.
If,
in any year, the Fund were to fail to qualify for treatment as a RIC under the
Code for any reason, and were not able to cure such failure, the Fund would be
treated as a “C Corporation” and, as such, would be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax‑exempt income and net long-term
capital gains, would be taxable to shareholders as dividends.
Prepayment or Call Risk. Many fixed income securities give the issuer
the option to prepay or call the security prior to its maturity date. Issuers
often exercise this right when interest rates fall. Accordingly, if the Fund
holds a fixed income security that can be prepaid or called prior to its
maturity date, it may not benefit fully from the increase in value that other
fixed income securities generally experience when interest rates fall. Upon
prepayment of the security, the Fund also would be forced to reinvest the
proceeds at then current yields, which would be lower than the yield of the
security that was prepaid or called. In addition, if the Fund purchases a fixed
income security at a premium (at a price that exceeds its stated par or
principal value), the Fund may lose the amount of the premium paid in the event
of prepayment.
Extension Risk. During periods of rising
interest rates, the average life of certain types of securities may be extended
because of slower than expected principal payments. This may lock in a below
market interest rate, increase the security’s duration (the estimated period
until the security is paid in full) and reduce the value of the security.
QIB Qualification Risk. The event-linked bonds and Quota Share Notes
in which the Fund invests are only available to qualified institutional buyers
(“QIBs”), as defined in Rule 144A under the 1933 Act. At any given time, the
Fund may not have sufficient assets to be deemed a QIB for purposes of Rule
144A, whether because investment losses or redemptions cause the Fund’s assets
to drop below the threshold amount or for other reasons. In the event the Fund
does not qualify as a QIB, it will not be able to purchase additional
event-linked bonds or Quota Share Notes, which may prevent the Fund from
achieving its investment objective.
Subordinated Securities Risk. Certain SPVs in
which the Fund invests may issue multiple tranches of interests to investors. A
holder of securities that are subordinated or “junior” to more senior securities
of an issuer is entitled to payment after holders of more senior securities of
the issuer. Subordinated securities are more likely to suffer a credit loss than
non‑subordinated securities of the same issuer, any loss incurred by the
subordinated securities is likely to be proportionately greater, and any
recovery of interest or principal may take more time. As a result, even a
perceived decline in creditworthiness of the issuer is likely to have a greater
impact on them.
Government Securities Risk. The Fund may invest in securities issued or guaranteed by
the U.S. government (including U.S. Treasury obligations which differ in their
interest rates, maturities and times of issuance) or its agencies and
instrumentalities (such as the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae), or the Federal
Home Loan Mortgage Corporation (Freddie Mac)). U.S. government securities are
subject to market risk, risks related to changes in interest rates, and credit
19
risk.
Securities, such as those issued or guaranteed by Ginnie Mae or the U.S.
Treasury, that are backed by the full faith and credit of the United States are
guaranteed only as to the timely payment of interest and principal when held to
maturity and the market prices for such securities will fluctuate.
Notwithstanding that these securities are backed by the full faith and credit of
the United States, circumstances could arise that would prevent the payment of
interest or principal. This would result in losses to the Fund. Securities
issued or guaranteed by U.S. government related organizations, such as Fannie
Mae and Freddie Mac, are not backed by the full faith and credit of the U.S.
government and no assurance can be given that the U.S. government would provide
financial support. Therefore, U.S. government-related organizations may not have
the funds to meet their payment obligations in the future. As a result of their
high credit quality and market liquidity, U.S. government securities generally
provide a lower current return than obligations of other issuers.
The
U.S. Treasury Department placed Fannie Mae and Freddie Mac into conservatorship
in September 2008. Fannie Mae and Freddie Mac are continuing to operate as going
concerns while in conservatorship and each remains liable for all of its
obligations, including its guaranty obligations, associated with its
mortgage-backed securities. Although the U.S. government has provided financial
support to Fannie Mae and Freddie Mac, there can be no assurance that it will
continue to support these or other government-sponsored entities in the future.
Further, the benefits of any such government support may extend only to the
holders of certain classes of an issuer’s securities.
Focused Investment Risk. Issuers of
event-linked bonds and other reinsurance-related securities are generally
classified as belonging to the financial services sector; however, the Fund has
no current intention to invest in banks or other issuers that may be commonly
considered in the financial services sector. As a result of this categorization
of reinsurance-related securities, the Fund may be subject to the risks of such
focused investing. The industries within the financial services sector are
subject to extensive government regulation, which can limit both the amounts and
types of loans and other financial commitments they can make, and the interest
rates and fees they can charge. Profitability can be largely dependent on the
availability and cost of capital funds and the rate of corporate and consumer
debt defaults, and can fluctuate significantly when interest rates change.
Credit losses resulting from financial difficulties of borrowers can negatively
affect the financial services industries. Insurance companies can be subject to
severe price competition. The financial services industries are currently
undergoing relatively rapid change as existing distinctions between financial
service segments become less clear. For example, recent business combinations
have included insurance, finance, and securities brokerage under single
ownership. Foreign financial services companies, including insurance companies,
may be subject to different levels of regulation than that to which similar
companies operating in the U.S. are subject.
Similarly, to the extent the Fund has exposure to a significant extent in
investments tied economically to a specific geographic region, country or a
particular market, it will have more exposure to regional and country economic
risks than it would if it had more geographically diverse investments.
Cash Management Risk. The value of the
investments held by the Fund for cash management or temporary defensive purposes
may be affected by changing interest rates and by changes in credit ratings of
the investments. To the extent that the Fund has any uninvested cash, the Fund
will be subject to risk with respect to the depository institution holding the
cash. To the extent the Fund makes temporary or defensive investments in cash or
cash equivalents, it might not achieve its investment objective.
Securities Lending Risk. As with other
extensions of credit, there are risks of delay and costs involved in recovery of
securities or even loss of rights in the securities loaned or in the collateral
if the borrower of the securities fails to return the securities in a timely
manner or at all, or fails financially. These delays and costs could be greater
with respect to foreign securities. The Fund may pay lending fees to the party
arranging the Fund’s securities loans. Securities lending collateral may be
invested in liquid, short-term investments, such as money market funds, managed
by third party advisers or banks. The Fund bears the risk of investments made
with the cash collateral received by the Fund in securities lending
transactions. Investments of cash collateral may depreciate and/or become
illiquid, although the Fund remains obligated to return the collateral amount to
the borrower upon termination or maturity of the securities loan and may realize
losses on the collateral investments and/or be required to liquidate other
portfolio assets in order to satisfy its obligations.
20
Investing in Other Investment Companies
Risk. Investing in other
investment companies subjects the Fund to the risks of investing in the
underlying securities or assets held by those investment companies. When
investing in another investment company, the Fund will bear a pro rata portion
of the underlying fund’s expenses, in addition to its own expenses.
Expense Risk. Your actual costs of investing in
the Fund may be higher than the expenses shown in “Annual Fund Operating
Expenses” for a variety of reasons. For example, expense ratios may be higher
than those shown if overall net assets decrease. The Fund’s expense limitation
agreement, which generally remains in effect for a period of one year, mitigates
this risk. However, there is no assurance that the Adviser will renew such
expense limitation agreement from year‑to‑year.
The
Fund may invest in exchange-traded funds or other pooled investment vehicles. As
an investor in a pooled investment vehicle, the Fund would be subject to its
ratable share of that pooled investment vehicle’s expenses, including its
advisory and administration expenses.
Disclosure
of Portfolio Holdings
A
description of the Fund’s policies and procedures with respect to the disclosure
of its portfolio holdings is available in the Statement of Additional
Information. The holdings of the Fund are disclosed quarterly in filings with
the Commission on Form N‑PORT as of the end of the first and third quarters of
the Fund’s fiscal year and on Form N‑CSR as of the second and fourth quarters of
the Fund’s fiscal year. The Fund’s fiscal year ends on October 31. You can find
the Commission filings on the Commission’s website, www.sec.gov.
MANAGEMENT
AND ORGANIZATION
Investment
Adviser
Stone
Ridge is the Fund’s investment adviser. The Adviser was organized as a Delaware
limited liability company in 2012. Its primary place of business is at One
Vanderbilt Avenue, 65th Floor, New York, NY 10017. The Adviser’s primary
business is to provide a variety of investment management services, including an
investment program for the Fund. The Adviser is responsible for all business
activities and oversight of the investment decisions made for the Fund. As of
December 31, 2023, the Adviser’s assets under management were approximately
$21 billion.
In
return for providing management services to the Fund, the Fund pays the Adviser
an annual fee.
For
the fiscal year ended October 31, 2023, the Fund paid 1.51% of its average
daily net assets to the Adviser, after taking into account its contractual fee
waiver/expense reimbursement.
A
discussion regarding the basis of the Board’s approval of the investment
management agreement between Stone Ridge Trust, on behalf of the Fund, and the
Adviser is available in the Fund’s annual report to shareholders for the fiscal
year ended October 31, 2023.
Portfolio
Managers
Paul
Germain
Paul
Germain, Portfolio Manager of the Fund, is responsible for the day‑to‑day
management of the Fund and its investments jointly with Mr. Nyren,
Mr. Robbins, Mr. Stevens and Mr. Zhitnitsky. Prior to joining
Stone Ridge in 2015, Mr. Germain was the Global Head of Prime Services at
Credit Suisse, where he worked from 2010 to 2015. Mr. Germain received his
MBA from Harvard Business School and his BSE in Management from University of
Pennsylvania (Wharton).
21
Alexander
Nyren
Alexander
Nyren, Portfolio Manager of the Fund, is responsible for the day‑to‑day
management of the Fund and its investments jointly with Mr. Germain, Mr.
Robbins, Mr. Stevens and Mr. Zhitnitsky. Prior to joining Stone Ridge in 2013,
Mr. Nyren was in the insurance practice of Oliver Wyman since 2010, where he was
a Principal. Mr. Nyren received an MPhil in Economics from the University of
Cambridge and a BA with highest honors in Applied Mathematics from Harvard
University.
Benjamin
Robbins
Benjamin
Robbins, Portfolio Manager of the Fund, is responsible for the day‑to‑day
management of the Fund and its investments jointly with Mr. Germain,
Mr. Nyren, Mr. Stevens and Mr. Zhitnitsky. Prior to joining Stone
Ridge in 2014, Mr. Robbins was a Director at Deutsche Bank, where he worked
from 2006 to 2014 and managed a trading book of insurance-linked securities.
Mr. Robbins holds a BA, magna cum laude, in Physics from Harvard University
and is a CFA charterholder.
Ross
Stevens
Ross
Stevens, Portfolio Manager of the Fund, is responsible for the day‑to‑day
management of the Fund and its investments jointly with Mr. Germain,
Mr. Nyren, Mr. Robbins and Mr. Zhitnitsky. Mr. Stevens
founded Stone Ridge in 2012. Mr. Stevens received his PhD in Finance and
Statistics from the University of Chicago (Booth) and his BSE in Finance from
the University of Pennsylvania (Wharton).
Igor
Zhitnitsky
Igor
Zhitnitsky, Portfolio Manager of the Fund, is responsible for the day‑to‑day
management of the Fund and its investments jointly with Mr. Germain,
Mr. Nyren, Mr. Robbins and Mr. Stevens. Prior to joining Stone
Ridge in 2016, Mr. Zhitnitsky was a risk manager at SCOR SE, where he
oversaw reinsurance planning and capital management. Mr. Zhitnitsky holds a
BS, summa cum laude, in Mathematics from Rensselaer Polytechnic Institute, and
completed graduate work in pursuit of a PhD in mathematics from New York
University (Courant).
Additional
Information Regarding the Adviser and Portfolio Managers
The
Statement of Additional Information provides additional information about the
Adviser, including information about potential conflicts of interest that the
Adviser may face in managing the Fund, and about each Portfolio Manager’s
compensation, other accounts managed by each Portfolio Manager, and each
Portfolio Manager’s ownership of securities in the Fund. The Statement of
Additional Information is part of this prospectus and is available free of
charge by calling (855) 609‑3680 or at www.stoneridgefunds.com. The information
(other than this prospectus, including the Statement of Additional Information)
contained on, or that can be accessed through, www.stoneridgefunds.com is not
part of this prospectus or the Statement of Additional Information.
Distributor,
Administrator and Transfer Agent
ALPS
Distributors, Inc., 1290 Broadway, Suite 1000, Denver, Colorado 80203 is the
Fund’s distributor (the “Distributor”). U.S. Bancorp Fund Services, LLC, doing
business as U.S. Bank Global Fund Services, 615 East Michigan Street, Milwaukee,
Wisconsin 53202 is the Fund’s transfer agent (the “Transfer Agent”),
administrator (the “Administrator”) and accounting agent. The Adviser pays fees
to the Distributor as compensation for the services it renders. The Fund
compensates the Transfer Agent for its services.
SHAREHOLDER
INFORMATION
Fund
Closings
The
Fund may close at any time to new investments and, during such closings, only
the reinvestment of dividends by existing shareholders will be permitted. The
Fund may re‑open to new investment and subsequently
22
close
again to new investment at any time at the discretion of the Adviser. In
addition, the Fund expects to close to new investors and investments by existing
investors for a period of time in the event that the Stone Ridge Post-Event
Reinsurance Fund, a closed‑end interval fund managed by the Adviser, commences
investment operations. During any time the Fund is closed to new investments,
Fund shareholders will continue to be able to redeem their shares, as described
below.
How
Fund Share Prices Are Calculated
The
NAV per share of the Fund’s Class I shares and Class M shares is
determined by dividing the total value of the applicable class’s proportionate
interest in the Fund’s portfolio investments, cash and other assets, less any
liabilities (including accrued expenses or dividends) allocable to that class,
by the total number of shares of that class outstanding. While the assets of
each of Class I shares and Class M shares are invested in a single
portfolio of securities, the NAV of each respective Class will differ
because each of Class I shares and Class M shares have different
expenses. The Fund’s shares are typically valued as of a particular time (the
“Valuation Time”) on each day that the New York Stock Exchange (“NYSE”) opens
for business.1 The
Valuation Time is ordinarily at the close of regular trading on the NYSE
(normally 4:00 p.m. Eastern time). In unusual circumstances, the Valuation Time
may be at a time other than 4:00 p.m. Eastern time, for example, in the event of
an earlier, unscheduled close or halt of trading on the NYSE. Current NAV per
share of the Fund’s classes may be obtained by contacting the Transfer Agent by
telephone at (855) 609‑3680.
In
accordance with the regulations governing registered investment companies, the
Fund’s transactions in portfolio securities and purchases and sales of Fund
shares (which bear upon the number of Fund shares outstanding) are generally not
reflected in the NAV determined for the business day on which the transactions
are effected (the trade date), but rather on the following business day.
The
Board has approved procedures pursuant to which the Fund values its investments
(the “Valuation Procedures”). The Board has established a Valuation Committee
(the “Board Valuation Committee”), which has designated the Adviser to serve as
“valuation designee” in accordance with Rule 2a‑5 of the 1940 Act and, in that
capacity, to bear responsibility for implementing the Valuation Procedures,
including performing fair value determinations relating to all investments held
by the Fund (as needed) and periodically assessing and managing any material
valuation risks and establishing and applying fair value methodologies, subject
to the oversight of the Board Valuation Committee and certain reporting and
other requirements as described in the Valuation Procedures. A committee
consisting of personnel of the Adviser (the “Adviser Valuation Committee”)
performs certain functions in implementing the Valuation Procedures, including
with respect to the performance of fair value determinations.
Listed
below is a summary of certain of the methods generally used currently to value
investments of the Fund under the Valuation Procedures:
With
respect to pricing of insurance-linked securities for which at least one
designated independent broker provides a price, that price (or, if multiple
designated independent brokers provide a price, the average of such prices) will
be used to value the security. The Funds typically utilize an independent data
delivery vendor to obtain the prices, average them and communicate the resulting
value to the Administrator. If no designated independent broker provides a price
for the security in question, the Adviser Valuation Committee will generally
utilize prices provided by one or more other brokers that the Adviser has
approved to value the security. For certain securities, an administrator or
third-party manager may regularly provide NAVs that may be used to determine the
price at which an investor can subscribe for or redeem an investment in that
security, subject to any relevant restrictions on the timing of such
subscriptions or
1 |
The
NYSE is generally open from Monday through Friday, 9:30 a.m. to 4:00 p.m.,
Eastern time. NYSE, NYSE Arca, NYSE Bonds and NYSE Arca Options markets
will generally close on, and in observation of the following holidays: New
Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday, Good
Friday, Memorial Day, Juneteenth National Independence Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
|
23
redemptions.
The Adviser Valuation Committee will generally rely upon such valuations, with
any necessary adjustment to reflect relevant corporate actions (e.g., dividends
paid but not yet reflected in the reported NAV).
Non‑prime
money market funds and cash sweep programs are generally valued at amortized
cost.
Other
debt securities, including corporate and government debt securities (of U.S. or
foreign issuers) and municipal debt securities, loans, mortgage-backed
securities, collateralized mortgage obligations and other asset-backed
securities (except event-linked bonds) are valued by an independent pricing
service at an evaluated (or estimated) mean between the closing bid and asked
prices.
For
investments in investment companies that are registered under the 1940 Act
(other than non‑prime money market funds), the value of the shares of such funds
is calculated based upon the NAV per share of such funds. The prospectuses for
such funds explain the circumstances under which they will use fair value
pricing and its effects.
Equity
securities (other than insurance-linked securities that are valued pursuant to
the valuation methods described above) are valued at the last sale, official
close or if there are no reported sales at the mean between the bid and asked
price on the primary exchange on which they are traded. The values of the Fund’s
investments in publicly-traded foreign equity securities generally will be the
closing or final trading prices in the local trading markets but may be adjusted
based on values determined by a pricing service using pricing models designed to
estimate changes in the values of those securities between the times in which
the trading in those securities is substantially completed and the close of the
NYSE.
Exchange-traded
derivatives, such as options and futures contracts, are valued at the settlement
price on the exchange or mean of the bid and asked prices.
Non‑exchange
traded derivatives, including OTC options, are generally valued on the basis of
valuations provided by a pricing service or using quotes provided by a
broker/dealer (typically the counterparty).
Generally,
the Fund must value its assets using market quotations when they are readily
available. If, with respect to any portfolio instrument, market quotations are
not readily available or available market quotations are deemed to be unreliable
by the Adviser Valuation Committee, then such instruments will be fair valued as
determined in good faith by the Adviser Valuation Committee. In these
circumstances, the Fund determines fair value in a manner that seeks to reflect
the market value of the security on the valuation date based on consideration by
the Adviser Valuation Committee of any information or factors it deems
appropriate.
Fair
value pricing may require subjective determinations about the value of a
portfolio instrument. Fair values may differ from quoted or published prices, or
from prices that are used by others, for the same investments. Also, the use of
fair value pricing may not always result in adjustments to the prices of
securities or other assets or liabilities held by the Fund. It is possible that
the fair value determined for a security may be materially different than the
value that could be realized upon the sale of such security. Thus, fair
valuation may have an unintended dilutive or accretive effect on the value of
shareholders’ investments in the Fund.
A
substantial portion of the Fund’s investments are U.S. dollar denominated
investments. Investments initially valued in currencies other than the U.S.
dollar are converted to U.S. dollars using exchange rates obtained from pricing
services. As a result, the NAV of the Fund’s shares may be affected by changes
in the value of currencies in relation to the U.S. dollar. International markets
are sometimes open on days when U.S. markets are closed, which means that the
value of foreign securities owned by the Fund could change on days when Fund
shares cannot be bought or sold. The value of investments traded in markets
outside the U.S. or denominated in currencies other than the U.S. dollar may be
affected significantly on a day that the NYSE is closed, and the NAV of the
Fund’s shares may change on days when an investor is not able to purchase,
redeem or exchange shares. The calculation of the Fund’s NAV may not take place
contemporaneously with the determination of the prices of foreign securities
used in NAV calculations.
24
INVESTING
IN THE FUND
The
Fund offers two classes of shares — Class I shares and Class M shares.
This prospectus describes the Class I shares and Class M shares of the Fund.
Eligibility
to Buy Class I and Class M Shares
The
Fund’s Class I shares and Class M shares are offered to the following
groups of investors (“Eligible Investors”):
|
1. |
Institutional
investors, including registered investment advisers (RIAs);
|
|
2. |
Clients
of institutional investors; |
|
3. |
Tax‑exempt
retirement plans of the Adviser and its affiliates and rollover accounts
from those plans; |
|
4. |
Certain
other Eligible Investors as approved from time to time by the Adviser.
Eligible Investors include employees, former employees, shareholders,
members and directors of the Adviser and the Fund or its affiliates, and
friends and family members of such persons; and |
|
5. |
Investment
professionals or other financial intermediaries investing for their own
accounts and their immediate family members. |
Some
intermediaries may impose different or additional eligibility requirements. The
Fund has the discretion to further modify or waive its eligibility requirements.
Shares
of the Fund generally may be sold only to U.S. citizens, U.S. residents, and
U.S. domestic corporations, partnerships, trusts or estates. The Fund reserves
the right to refuse any request to purchase shares. Each Class of shares is
subject to the investment minimums described below.
Investment
Minimums
Class I Shares
The
minimum initial investment is $25 million. For eligibility groups 3, 4 and
5 described above under “Eligibility to Buy Class I Shares and Class M
Shares,” there will be no minimum investment requirement.
Class M Shares
The
minimum initial investment is $250,000.
These
minimums may be waived or reduced in certain circumstances, and they may be
modified and/or applied in the aggregate for certain intermediaries that submit
trades on behalf of underlying investors (e.g., registered investment advisers
or benefit plans). Differences in the policies of different intermediaries may
include different minimum investment amounts. There is no minimum for subsequent
investments. All share purchases are
subject to approval of the Adviser.
Other
Policies
No Certificates
The
issuance of shares is recorded electronically on the books of the Fund. You will
receive a confirmation of, or account statement reflecting, each new transaction
in your account, which will also show the total number of shares of the Fund you
own. You can rely on these statements in lieu of certificates. The Fund does not
issue certificates representing shares of the Fund.
25
Involuntary Redemptions
The
Fund reserves the right to redeem an account if the value of the shares in the
Fund is $1,000 or less for any reason, including market fluctuation. Before the
Fund redeems such shares and sends the proceeds to the shareholder, it will
notify the shareholder that the value of the shares in the account is less than
the minimum amount and will allow the shareholder 60 days to make an additional
investment in an amount that will increase the value of the account(s) to the
minimum amount specified above before the redemption is processed. As a sale of
your Fund shares, this redemption may have tax consequences.
In
addition, the Fund reserves the right under certain circumstances to redeem all
or a portion of an account, without consent of or other action by the
shareholder. The Fund may exercise this
right, for example, if a shareholder invests in a share class for which the
shareholder was not eligible at the time of investment.
Lost Shareholders, Inactive Accounts and Unclaimed
Property
It
is important that each shareholder ensures that the address on file with the
Transfer Agent is correct and current to ensure that the investor receives
account statements and other important mailings and that the account is not
deemed abandoned in accordance with state law. Accounts may be deemed abandoned
if no activity occurs within the account during the “inactivity period”
specified in the applicable state’s abandoned property laws, which vary by
state. The Fund is legally obligated to escheat (or transfer) abandoned property
to the appropriate state’s unclaimed property administrator in accordance with
statutory requirements. The investor’s last known address of record determines
which state has jurisdiction. While the Transfer Agent will, if it receives
returned mail, attempt to locate the investor or rightful owner of the account
in accordance with applicable law, if the Transfer Agent is unable to locate the
investor and the account is legally considered abandoned, then it will follow
the applicable escheatment requirements. It is your responsibility to ensure
that you maintain a correct address for your account. Please proactively contact
the Transfer Agent toll-free at (855) 609 3680 at least annually to ensure your
account remains in active status. The Fund and the Adviser will not be liable to
shareholders or their representatives for good faith compliance with escheatment
laws.
HOW
TO BUY CLASS I AND CLASS M SHARES
How
to Buy Shares
The
Fund has authorized the Transfer Agent and Distributor to receive orders on its
behalf, and the Distributor has authorized select intermediaries to receive
orders on behalf of the Fund. These intermediaries may be authorized to
designate other intermediaries to receive orders on the Fund’s behalf. The Fund
is deemed to have received an order when the Transfer Agent, the Distributor, an
intermediary, or if applicable, an intermediary’s authorized designee, receives
the order in good order. Investors who invest in the Fund through an
intermediary should contact their intermediary regarding purchase procedures.
Investors may be charged a fee if they effect transactions through an
intermediary.
The
Fund is generally sold to (i) institutional investors, including registered
investment advisers (RIAs), that meet certain qualifications and have completed
an educational program provided by the Adviser; (ii) clients of such
institutional investors; and (iii) certain other Eligible Investors (as
defined in “Eligibility to Buy Class I Shares and Class M Shares”
above). Certain investors may purchase
the Fund’s Class I shares and Class M shares directly from the
Transfer Agent by first contacting the Adviser at (855) 609‑3680 to notify
the Adviser of the proposed investment. Once notification has occurred, if
approved, the investor will be directed to the Transfer Agent to complete the
purchase transaction.
All
investments are subject to approval of the Adviser, and all investors must
complete and submit the necessary account registration forms in good order. The
Fund reserves the right to reject any initial or additional investment and to
suspend the offering of shares. Purchase through a financial intermediary does
not affect these eligibility requirements.
26
Purchase
through a financial intermediary does not affect these eligibility requirements
or those set out in “Investing in the Fund,” above.
A
purchase of the Fund’s Class I shares and Class M shares will be made
at the NAV per share next determined following receipt of a purchase order in
good order by the Fund, the Transfer Agent, the Distributor, an intermediary or
an intermediary’s authorized designee if received at a time when the Fund is
open to new investments. A purchase, exchange or redemption order is in “good
order” when the Fund, the Transfer Agent, the Distributor, an intermediary or,
if applicable, an intermediary’s authorized designee, receives all required
information, including properly completed and signed documents, and the purchase
order is approved by the Adviser. Once the Fund (or one of its authorized
agents, described above) accepts a purchase order, you may not cancel or revoke
it; however, you may redeem the shares. The Fund may withhold redemption
proceeds until it is reasonably satisfied it has received your payment. The Fund
reserves the right to cancel any purchase or exchange order it receives if the
Fund believes that it is in the best interest of the Fund’s shareholders to do
so.
Clients
of investment advisory organizations may also be subject to investment advisory
and other fees under their own arrangements with such organizations.
At
the discretion of the Adviser, shares of the Fund may be purchased in exchange
for securities that are eligible for acquisition by the Fund or otherwise
represented in its portfolio as described in this prospectus or as otherwise
consistent with the Trust’s policies or procedures or in exchange for local
currencies in which securities owned by the Fund are denominated or traded.
Securities and local currencies accepted by the Fund for exchange and Fund
shares to be issued in the exchange will be valued as set forth under “How Fund
Share Prices are Calculated” at the time of the next determination of NAV after
such acceptance. All dividends, interest, subscription or other rights
pertaining to such securities shall become the property of the Fund and, if
received by the investor, must be delivered to the Fund by the investor upon
receipt from the issuer. Investors who desire to purchase shares with local
currencies should first contact the Adviser.
The
Fund will not accept securities in exchange for shares unless: (1) such
securities are, at the time of the exchange, eligible to be included, or
otherwise represented, in the Fund; (2) current market values are available
for such securities based on the Trust’s valuation procedures; and (3) the
investor represents and agrees that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the 1933 Act,
under the laws of the country in which the principal market for such securities
exists or otherwise.
Investors
who are subject to federal taxation generally will realize gain or loss for
federal income tax purposes upon the exchange. The amount of such gain or loss
depends upon the difference between the value of Fund shares received and the
tax basis of the securities or local currency the Fund accepted in exchange.
Investors
interested in such exchanges should contact the Adviser.
Customer
Identification Program
To
help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify
and record information that identifies each person that opens a new account and
to determine whether such person’s name appears on government lists of known or
suspected terrorists and terrorist organizations.
In
compliance with the USA PATRIOT Act of 2001, please note that the Transfer Agent
or authorized intermediary will verify certain information upon account opening
as part of Stone Ridge Trust’s Anti-Money Laundering Program. You will be asked
to supply certain required information, such as your full name, date of birth,
social security number and permanent street address. If you are opening the
account in the name of a legal entity (e.g., partnership, limited liability company,
business trust, corporation, etc.), you must also supply the identity of the
beneficial owners. Mailing addresses containing only a P.O. Box may not be
accepted.
If
the identity of a customer cannot be verified, the account will be rejected or
the customer will not be allowed to perform a transaction on the account until
the customer’s identity is verified. The Fund also reserves the right
27
to
close the account within 5 business days if clarifying information/documentation
is not received. If your account is closed for this reason, your shares will be
redeemed at the NAV next calculated after the account is closed.
The
Fund and its agents will not be responsible for any loss in an investor’s
account resulting from the investor’s delay in providing all required
identifying information or from closing an account and redeeming an investor’s
shares when an investor’s identity is not verified.
The
Fund may be required to “freeze” your account if there appears to be suspicious
activity or if account information matches information on a government list of
known terrorists or other suspicious persons.
HOW
TO REDEEM CLASS I AND CLASS M SHARES
Investors
who invest in the Fund through an intermediary should contact their intermediary
regarding redemption procedures. The Fund is deemed to have received a
redemption order when the Transfer Agent, the Distributor, an authorized
intermediary, or if applicable, an intermediary’s authorized designee, receives
the redemption order in good order. Investors holding Fund shares directly
through the Transfer Agent who desire to redeem shares of the Fund must first
contact the Adviser at (855) 609‑3680. Once notification has occurred, the
investor will be directed to the Transfer Agent to complete the sale
transaction. A redemption of the Fund’s shares will be made at the NAV per share
next determined following receipt of a written redemption order in good order by
the Fund, the Transfer Agent, the Distributor, an intermediary or an
intermediary’s authorized designee.
The
redemption of all shares in an account will result in the account being closed.
A new Account Registration Form will be required for future investments. See
“How to Buy Class I Shares and Class M Shares” above. Certificates for
shares are not issued.
Payments
of Redemption Proceeds
Redemption
orders are valued at the NAV per share next determined after the shares are
properly tendered for redemption, as described above. Payment for shares
redeemed generally will be made within seven days after receipt of a valid
request for redemption. The Fund may temporarily stop redeeming shares or delay
payment of redemption proceeds when the NYSE is closed or trading on the NYSE is
restricted, when an emergency exists and the Fund cannot sell shares or
accurately determine the value of assets, or if the Commission orders the Fund
to suspend redemptions or delay payment of redemption proceeds.
At
various times, the Fund may be requested to redeem shares for which it has not
yet received good payment. If this is the case, the forwarding of proceeds may
be delayed until payment has been collected for the purchase of the shares. The
delay may last 7 days or more. The Fund intends to forward the redemption
proceeds as soon as good payment for purchase orders has been received. This
delay may be avoided if shares are purchased by wire transfer. Although the Fund
generally intends to pay cash for all shares redeemed using cash held by the
Fund or generated by the Fund through selling cash equivalents, selling
investments, or using overdraft provisions or lines of credit, the Fund reserves
the right, under certain circumstances (such as stressed market conditions), to
make a redemption payment, in whole or in part, in portfolio securities that
have a market value at the time of redemption equal to the redemption price. In
cases where the Fund uses assets other than cash for redemption payments, the
value of the non‑cash assets is determined as of the redemption date;
consequently, as a result of changes in market prices, the value of those assets
when received by the redeeming shareholder may be lower or higher than their
value as of the redemption date. Investors may incur brokerage charges or other
transaction costs selling securities that were received in payment of
redemptions.
You
can arrange for cash proceeds of a redemption to be sent by wire transfer to a
single previously designated bank account if you have given authorization for
expedited wire redemption on your Account Application. This redemption option
does not apply to shares held in broker “street name” accounts. If a request for
a wire redemption is received by the Fund prior to the close of the NYSE, the
shares will be redeemed that day at the
28
next
determined NAV, and the proceeds will generally be sent to the designated bank
account the next business day. The bank must be a member of the Federal Reserve
wire system. Delivery of the proceeds of a wire redemption request may be
delayed by the Fund for up to seven days if deemed appropriate under then
current market conditions. Redeeming shareholders will be notified if a delay in
transmitting proceeds is anticipated. The Fund cannot be responsible for the
efficiency of the Federal Reserve wire system or the shareholder’s bank. You are
responsible for any charges imposed by your bank. The Fund reserves the right to
terminate the wire redemption privilege. To change the name of the single bank
account designated to receive wire redemption proceeds, you must send a written
request with a signature guarantee to the Fund, c/o U.S. Bank Global Fund
Services, 615 East Michigan Street, Milwaukee, Wisconsin 53202, or contact your
financial intermediary.
Signature
guarantees can be obtained from domestic banks, brokers, dealers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies and savings associations, as well as from participants in the New York
Stock Exchange Medallion Signature Program and the Securities Transfer Agents
Medallion Program, but not from a notary public.
The
Fund and/or the Transfer Agent or your financial intermediary reserve the right
to require a signature guarantee in other instances based on the circumstances.
Dividend
Reinvestment Plan
Dividends
and capital gains distributions are treated in accordance with the instructions
on your account opening form, and either are automatically reinvested, without
sales charges, into the relevant share class or are distributed to you in cash.
Your taxable income is the same regardless of which option you choose. As long
as you hold Fund shares, you may change your election to participate in the
dividend reinvestment plan by notifying the Transfer Agent or your financial
intermediary, as applicable.
For
further information about dividend reinvestment, contact the Transfer Agent by
telephone at (855) 609‑3680 or contact your financial intermediary.
Distributions
and Federal Income Tax Matters
This
section summarizes some of the important U.S. federal income tax consequences of
investing in the Fund. This discussion does not address all aspects of taxation
that may apply to shareholders or to specific types of shareholders such as
tax‑deferred retirement plans and persons who are not “U.S. persons” within the
meaning of the Code. You should consult your tax adviser for information
concerning the possible application of federal, state, local, or foreign tax
laws to you. Please see the Statement of Additional Information for additional
information regarding the tax aspects of investing in the Fund.
The
Fund has elected and currently intends to qualify to be treated as a “regulated
investment company” under Subchapter M of Chapter 1 of the Code (a “RIC”). A RIC
generally is not subject to federal income tax at the fund level on income and
gains that are timely distributed to shareholders. To qualify for such
treatment, the Fund must meet certain income, asset diversification and
distribution requirements.
The
Fund’s investment strategy will potentially be limited by its intention to
qualify for treatment as a regulated investment company. The tax treatment of
certain of the Fund’s investments under one or more of the qualification or
distribution tests applicable to RICs is not certain. An adverse determination
or future guidance by the IRS or change in law might affect the Fund’s ability
to qualify for such treatment.
If,
in any year, the Fund were to fail to qualify for treatment as a RIC under the
Code for any reason, and were not able to cure such failure, the Fund would be
treated as a “C corporation” and, as such, would be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax‑exempt income and net long-term
capital gains, would be taxable to shareholders as dividends. The Fund could in
some cases cure such failure, including by paying a Fund-level tax or interest,
making additional distributions, or disposing of certain assets.
29
The
Fund invests substantially in foreign securities. Many or most of the Fund’s
investments in foreign securities may be controlled foreign corporations for
U.S. federal income tax purposes (each a “CFC”). The Fund will generally be
required to include in gross income each year, as ordinary income that is
included in net investment income, its share of certain amounts of a CFC’s
income, whether or not the CFC distributes such amounts to the Fund. Under
current law, subpart F inclusions from investments in CFCs will constitute
“qualifying income” for the purposes of the 90% gross income requirement to the
extent it is either (i) timely and currently repatriated or
(ii) derived with respect to the Fund’s business of investing in stock,
securities or currencies. Investments by the Fund in CFCs could cause the Fund
to recognize taxable income in excess of cash generated by such investments,
potentially requiring the Fund to borrow money or dispose of investments to make
the distributions required to qualify for treatment as a RIC and to eliminate a
Fund-level tax and could affect the amount, timing and character of the Fund’s
distributions. For additional information, please refer to “Tax Status” in the
Statement of Additional Information.
The
Fund may invest in other foreign securities that are equity securities of
passive foreign investment companies (“PFICs”) for U.S. federal income tax
purposes. A foreign issuer in which the Fund invests will not be treated as a
PFIC with respect to the Fund if such issuer is a controlled foreign corporation
and the Fund holds (directly, indirectly or constructively) 10% or more of the
voting interests in or total value of such issuer. Investments in a PFIC
potentially (i) accelerate the recognition of income by the Fund without
the receipt of cash, (ii) increase the amount required to be distributed by
the Fund to qualify as a RIC or eliminate a Fund-level tax, (iii) result in
a higher percentage of Fund distributions treated as ordinary income, or
(iv) subject the Fund to a Fund-level tax that cannot be eliminated through
distributions.
The
Fund’s investment in foreign securities may be subject to foreign withholding
and other taxes, which may decrease the Fund’s return on those securities. The
Fund may be able to pass through to you a deduction or credit for such foreign
taxes, as further described in the Statement of Additional Information.
In
addition, the Fund’s investments in foreign securities, foreign currencies and
derivatives may increase or accelerate the Fund’s recognition of gain and may
affect the timing, amount or character of the Fund’s distributions.
The
Fund currently intends to make distributions at least annually of all or
substantially all of its net investment income and net realized capital gains,
if any. If you elect to reinvest distributions, your distributions will be
reinvested in additional shares of the same share class of the Fund at the NAV
calculated as of the payment date. The Fund will pay distributions on a
per‑share basis. As a result, on the ex‑dividend date of such a payment, the NAV
of the Fund will be reduced by the amount of the payment. If you are a
shareholder subject to federal income tax, you will be subject to tax on Fund
distributions in the manner described herein whether they are paid in cash or
reinvested in additional shares of the Fund. For federal income tax purposes,
distributions of net investment income are generally taxable to shareholders as
ordinary income. The tax treatment of Fund distributions of capital gains is
determined by how long the Fund owned (or is deemed to have owned) the
investments that generated them, rather than how long you owned your shares.
Distributions of net capital gains (the excess of net long-term capital gains
over its net short-term capital losses) that are properly reported by the Fund
as capital gain dividends (“Capital Gain Dividends”) will be taxable as
long-term capital gains includible in net capital gain and taxed to individuals
at reduced rates. Distributions of net gains from the sale or deemed disposition
of investments that the Fund owned (or is deemed to have owned) for one year or
less will be taxable as ordinary income.
Distributions
of investment income properly reported by the Fund as derived from “qualified
dividend income,” if any will be taxed to individuals at the rates applicable to
long-term capital gains, provided that
certain holding period and other requirements are met at both the shareholder
and Fund level.
If,
in and with respect to any taxable year, the Fund makes a distribution to a
shareholder in excess of the Fund’s current and accumulated earnings and
profits, the excess distribution will be treated as a return of capital to the
extent of such shareholder’s tax basis in its shares, and thereafter as capital
gain. A return of capital is not
30
taxable,
but it reduces a shareholder’s tax basis in its shares, thus reducing any loss
or increasing any gain on a subsequent taxable disposition by the shareholder of
its shares.
A
3.8% Medicare contribution tax is imposed on the “net investment income” of
certain individuals, estates and trusts to the extent that their income exceeds
certain threshold amounts. “Net investment income” generally includes dividends,
interest, and net gains from the disposition of investment property (including
the Fund’s ordinary income dividends, Capital Gain Dividends, and capital gains
recognized on the sale, redemption, or exchange of Fund shares). Shareholders
should consult their own tax advisers regarding the effect, if any, that this
provision may have on their investment in Fund shares.
A
dividend will be treated as paid on December 31 of a calendar year if it is
declared by the Fund in October, November or December with a record date in such
a month and paid by the Fund during January of the following calendar year. Early in each year, we will send you a
statement showing detailed federal tax information with respect to your
distributions for the prior tax year.
Distributions
are taxable to you in the manner described herein even if they are paid from
income or gains earned before your investment (and thus were included in the
price you paid for your shares). For example, if you purchase shares on or just
before the record date of the Fund distribution, you will pay full price for the
shares and could receive a portion of your investment back as a taxable
distribution.
Any
gain or loss resulting from the sale or exchange of your shares generally will
be treated as capital gain or loss for federal income tax purposes, which will
be long-term or short-term depending on how long you have held your shares.
Investments
through tax‑qualified retirement plans and other tax‑advantaged investors are
generally not subject to current federal income tax.
In
general, dividends (other than Capital Gain Dividends) paid by the Fund to a
person who is not a “U.S. person” within the meaning of the Code (a “foreign
shareholder”) are subject to withholding of U.S. federal income tax at a rate of
30% (or lower applicable treaty rate). However, the Code provides a withholding
tax exemption, if the Fund so elects, for certain interest-related dividends and
short-term capital gain dividends paid to foreign shareholders.
Sections
1471-1474 of the Code and the U.S. Treasury Regulations and IRS guidance issued
thereunder (collectively, “FATCA”) generally require the Fund to obtain
information sufficient to identify the status of each of its shareholders under
FATCA or under an applicable intergovernmental agreement (an “IGA”). If a
shareholder fails to provide this information or otherwise fails to comply with
FATCA or an IGA, the Fund may be required to withhold under FATCA 30% of
ordinary dividends the Fund pays to that shareholder. If a payment by the Fund
is subject to FATCA withholding, the Fund or its agent is required to withhold
even if such payment would otherwise be exempt from withholding under the rules
applicable to foreign shareholders described above. The IRS and the Department
of Treasury have issued proposed regulations providing that the gross proceeds
of share redemptions or exchanges and Capital Gain Dividends the Fund pays will
not be subject to FATCA withholding. Each prospective investor is urged to
consult its tax adviser regarding the applicability of FATCA and any other
reporting requirements with respect to the prospective investor’s own situation,
including investments through an intermediary. In addition, foreign countries
have implemented or are considering, and may implement, laws similar in purpose
and scope to FATCA, as more fully described above.
The
discussion above is very general. Please consult your tax adviser about the
effect that an investment in the Fund could have on your own tax situation,
including possible foreign, federal, state, or local tax consequences, or about
any other tax questions you may have.
Frequent
Purchases and Sales of Fund Shares
The
Fund is currently intended for long-term investment purposes. Excessive trading,
short-term trading and other abusive trading activities may be detrimental to
the Fund and its long-term shareholders by disrupting
31
portfolio
management strategies, increasing brokerage and administrative costs, harming
Fund performance and diluting the value of shares. Such trading may also require
the Fund to sell securities to meet redemptions, which could cause taxable
events that impact shareholders. The Fund will not knowingly permit shareholders
to market time or excessively trade the Fund to the detriment of the long-term
shareholders.
The
Fund has adopted procedures that are reasonably designed to detect and prevent
frequent trading activity that could be harmful to the Fund (the “Procedures”),
which include (1) fair valuation of non‑U.S. securities, where appropriate
and (2) periodic surveillance of shareholder trading activity and inquiry
as to the nature of the trading activity when appropriate.
With
respect to the periodic surveillance of shareholder trading activity, the
Adviser monitors trading in the Fund’s shares in an effort to identify trading
patterns that appear to indicate market timing or abusive trading practices, to
the extent reasonably practicable. In making such a judgement, the Adviser may
consider the size of the trades, the frequency and pattern of trades and other
factors considered relevant.
If
the Adviser determines that the trading history of an account appears to
indicate market timing or abusive trading practices, the Fund will provide
notice to the shareholder or the applicable financial intermediary to cease such
trading activities and, when appropriate, restrict or prohibit further purchases
or redemptions of shares for the account. If the trading history of an omnibus
account appears to indicate the possibility of market timing or abusive trading
practices, the Adviser may request underlying shareholder information from the
financial intermediary associated with the omnibus account pursuant to Rule
22c‑2 under the 1940 Act in order to make such a determination.
Some
financial intermediaries through which shares of the Fund are distributed submit
aggregate or net purchase and redemption orders through omnibus accounts. These
omnibus accounts often by nature engage in frequent transactions due to the
daily trading activity of their underlying investors. Because transactions by
omnibus accounts often take place on a net basis, the Adviser’s ability to
detect and prevent frequent trading is limited. In determining the frequency
with which the Adviser will seek shareholder transaction information from a
financial intermediary, the Adviser will consider (1) whether or not a Fund
imposes a redemption fee, (2) a Fund’s trading history (e.g., a history of
abnormally large inflows or outflows that may indicate the existence of frequent
trading), (3) the risks that frequent trading poses to the Fund and its
shareholders in light of the nature of the Fund’s investment program, including
its typical cash positions and whether its valuation policies mitigate the risks
associated with abusive trading practices, (4) the risks to the Fund and
its shareholders in light of the size of the transactions relative to the amount
of the Fund’s assets or the volume of the Fund’s subscriptions and redemptions
through a financial intermediary and (5) such other factors as are deemed
relevant or appropriate under the circumstances.
Although
the Procedures are designed to deter frequent trading, none of these measures
alone, nor taken together, eliminates the possibility that frequent trading will
occur in the Fund, particularly with respect to trades placed by shareholders
who invest in the Fund through omnibus accounts maintained by financial
intermediaries. It is understood that it may not be possible to identify and
monitor all accounts controlled by a potential frequent trader.
INTERMEDIARY
AND SERVICING ARRANGEMENTS
Financial
intermediaries may provide varying investment products, programs, platforms and
accounts for the benefit of shareholders. Such intermediaries generally charge
fees in connection with a variety of services, which include (i) personal
and account maintenance services, sub‑transfer agency services and custodial
services rendered to shareholders who are customers of the intermediary,
including electronic transmission and processing of orders, electronic fund
transfers between shareholders and the Fund, reinvestment of distributions,
settlement and reconciliation of transactions, liaising with the Transfer Agent,
facilitation of electronic delivery to shareholders of Fund documentation,
monitoring shareholder accounts for back‑up withholding and any other special
tax reporting obligations, maintenance of books and records with respect to the
foregoing, and other
32
similar
services (fees for such services, “servicing fees”) and/or (ii) activities
primarily intended to result in the sale of shares (fees for such services, if
any, “distribution fees” and, together with servicing fees, “intermediary
fees”). Such fees may be based on the number of accounts or may be a percentage
of the average value of accounts for which the intermediary provides services
and are intended to compensate intermediaries for their provision of services of
the type that would be provided by the Transfer Agent or other service providers
if the shares were registered on the books of the Fund. The Fund does not
believe that any portion of fees currently paid to financial intermediaries are
for distribution activities.
Intermediary
fees may be paid pursuant to a Distribution Plan (“12b‑1 Plan”) adopted by the
Fund with respect to its Class M shares, at the maximum annual rate of
0.15% of the Fund’s average daily net assets attributable to Class M. These
fees are paid out of the Fund’s Class M shares’ assets on an ongoing basis
and may be administered or facilitated by the Distributor. Because Rule 12b‑1
fees are paid out of the Fund’s Class M shares’ assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost you
more than other types of sales charges. If amounts remain from the Rule 12b‑1
fees after the intermediaries have been paid, such amounts are reimbursed to the
Fund. The Distributor does not retain any portion of the Rule 12b‑1 fees. To the
extent that there are expenses associated with shareholder services for the
Class M shares that exceed the amounts payable pursuant to the 12b‑1 Plan,
the Class M shares of the Fund will bear such expenses. For Class I
shares, the Adviser pays all intermediary fees.
33
FINANCIAL
HIGHLIGHTS
The
financial highlights in the following tables are intended to help you understand
the Fund’s financial performance for the fiscal period indicated. Certain
information reflects financial results for a single Fund share. The total return
in the tables represents the rate that an investor would have earned or lost on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by Ernst & Young LLP, whose report, along with the Fund’s
financial statements, is included in the annual report, which is available upon
request.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Class I |
|
Year Ended October 31, 2023 |
|
|
|
Year Ended October 31, 2022 |
|
|
|
Year Ended October 31, 2021 |
|
|
|
Year Ended October 31, 2020 |
|
|
|
Year Ended October 31, 2019 |
PER SHARE
DATA: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
| |
Net Asset Value, Beginning of Period |
|
|
$ |
8.09 |
| |
| |
|
$ |
9.01 |
| |
|
|
|
| |
|
$ |
9.28 |
| |
|
|
|
| |
|
$ |
9.30 |
| |
|
|
|
| |
|
$ |
9.54 |
|
|
|
|
|
|
|
|
|
| |
INVESTMENT OPERATIONS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net
Investment Income(1) |
|
|
|
0.79 |
| |
| |
|
|
0.44 |
| |
|
|
|
| |
|
|
0.43 |
| |
|
|
|
| |
|
|
0.45 |
| |
|
|
|
| |
|
|
0.44 |
|
Net
Realized and Unrealized Gains (Losses) |
|
|
|
1.00 |
| |
| |
|
|
(0.99 |
) |
|
|
|
|
| |
|
|
(0.23 |
) |
|
|
|
|
| |
|
|
0.06 |
| |
|
|
|
| |
|
|
(0.19 |
) |
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Total
from Investment Operations |
|
|
|
1.79 |
| |
| |
|
|
(0.55 |
) |
|
|
|
|
| |
|
|
0.20 |
| |
|
|
|
| |
|
|
0.51 |
| |
|
|
|
| |
|
|
0.25 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
LESS DISTRIBUTIONS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net
Investment Income |
|
|
|
(0.69 |
) |
|
| |
|
|
(0.37 |
) |
|
|
|
|
| |
|
|
(0.47 |
) |
|
|
|
|
| |
|
|
(0.53 |
) |
|
|
|
|
| |
|
|
(0.49 |
) |
Net
Realized Gains |
|
|
|
—
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Total
Distributions |
|
|
|
(0.69 |
) |
|
| |
|
|
(0.37 |
) |
|
|
|
|
| |
|
|
(0.47 |
) |
|
|
|
|
| |
|
|
(0.53 |
) |
|
|
|
|
| |
|
|
(0.49) |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Asset Value, End of Period |
|
|
$ |
9.19 |
| |
| |
|
$ |
8.09 |
| |
|
|
|
| |
|
$ |
9.01 |
| |
|
|
|
| |
|
$ |
9.28 |
| |
|
|
|
| |
|
$ |
9.30 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL RETURN(2) |
|
|
|
22.92 |
% |
|
| |
|
|
(6.40 |
)% |
|
|
|
|
| |
|
|
2.16 |
% |
|
|
|
|
| |
|
|
5.73 |
% |
|
|
|
|
| |
|
|
2.87 |
% |
|
|
|
|
|
|
|
|
| |
SUPPLEMENTAL DATA AND RATIOS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net Assets, End of Period (000’s) |
|
|
$ |
2,213,275 |
| |
| |
|
$ |
1,420,941 |
| |
|
|
|
| |
|
$ |
1,269,044 |
| |
|
|
|
| |
|
$ |
886,011 |
| |
|
|
|
| |
|
$ |
800,883 |
|
|
|
|
|
|
|
|
|
| |
Ratio of Expenses to Average Net
Assets: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Before
Expense Reimbursement/Recoupment |
|
|
|
1.75 |
%(3) |
|
| |
|
|
1.74 |
%(3) |
|
|
|
|
| |
|
|
1.73 |
%(3) |
|
|
|
|
| |
|
|
1.73 |
%(3) |
|
|
|
|
| |
|
|
1.71 |
%(3) |
After
Expense Reimbursement/Recoupment |
|
|
|
1.76 |
%(3) |
|
| |
|
|
1.72 |
%(3) |
|
|
|
|
| |
|
|
1.69 |
%(3) |
|
|
|
|
| |
|
|
1.68 |
%(3) |
|
|
|
|
| |
|
|
1.70 |
%(3) |
|
|
|
|
|
|
|
|
| |
Ratio of Net Investment Income (Loss) to
Average Net Assets: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Before
Expense Reimbursement/Recoupment |
|
|
|
9.07 |
%(3) |
|
| |
|
|
4.97 |
%(3) |
|
|
|
|
| |
|
|
4.73 |
%(3) |
|
|
|
|
| |
|
|
4.87 |
%(3) |
|
|
|
|
| |
|
|
4.75 |
%(3) |
After
Expense Reimbursement/Recoupment |
|
|
|
9.06 |
%(3) |
|
| |
|
|
4.99 |
%(3) |
|
|
|
|
| |
|
|
4.77 |
%(3) |
|
|
|
|
| |
|
|
4.92 |
%(3) |
|
|
|
|
| |
|
|
4.76 |
%(3) |
Portfolio Turnover Rate |
|
|
|
31.98 |
% |
|
| |
|
|
25.70 |
% |
|
|
|
|
| |
|
|
28.45 |
% |
|
|
|
|
| |
|
|
50.26 |
% |
|
|
|
|
| |
|
|
21.85 |
% |
(1) |
Net
investment income per share has been calculated based on average shares
outstanding during the period. |
(2) |
Total
Return represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming the reinvestment of all dividends and
distributions). |
(3) |
Includes
borrowing and investment-related expenses not covered by the Fund’s
expense limitation agreement. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Class M |
|
Year Ended October 31, 2023 |
|
|
|
Year Ended October 31, 2022 |
|
|
|
Year Ended October 31, 2021 |
|
|
|
Year Ended October 31, 2020 |
|
|
|
Year Ended October 31, 2019 |
PER SHARE
DATA: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
| |
Net Asset Value, Beginning of Period |
|
|
$ |
8.09 |
| |
| |
|
$ |
9.01 |
| |
|
|
|
| |
|
$ |
9.29 |
| |
|
|
|
| |
|
$ |
9.30 |
| |
|
|
|
| |
|
$ |
9.53 |
|
|
|
|
|
|
|
|
|
| |
INVESTMENT OPERATIONS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net
Investment Income(1) |
|
|
|
0.78 |
| |
| |
|
|
0.43 |
| |
|
|
|
| |
|
|
0.42 |
| |
|
|
|
| |
|
|
0.43 |
| |
|
|
|
| |
|
|
0.42 |
|
Net
Realized and Unrealized Gains (Losses) |
|
|
|
1.01 |
| |
| |
|
|
(0.99 |
) |
|
|
|
|
| |
|
|
(0.25 |
) |
|
|
|
|
| |
|
|
0.07 |
| |
|
|
|
| |
|
|
(0.18 |
) |
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Total
from Investment Operations |
|
|
|
1.79 |
(4) |
|
| |
|
|
(0.56 |
) |
|
|
|
|
| |
|
|
0.17 |
| |
|
|
|
| |
|
|
0.50 |
| |
|
|
|
| |
|
|
0.24 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
LESS DISTRIBUTIONS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net
Investment Income |
|
|
|
(0.68 |
) |
|
| |
|
|
(0.36 |
) |
|
|
|
|
| |
|
|
(0.45 |
) |
|
|
|
|
| |
|
|
(0.51 |
) |
|
|
|
|
| |
|
|
(0.47 |
) |
Net
Realized Gains |
|
|
|
—
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
| |
|
|
|
| |
|
|
— |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Total
Distributions |
|
|
|
(0.68 |
) |
|
| |
|
|
(0.36 |
) |
|
|
|
|
| |
|
|
(0.45 |
) |
|
|
|
|
| |
|
|
(0.51 |
) |
|
|
|
|
| |
|
|
(0.47 |
) |
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Asset Value, End of Period |
|
|
$ |
9.20 |
| |
| |
|
$ |
8.09 |
| |
|
|
|
| |
|
$ |
9.01 |
| |
|
|
|
| |
|
$ |
9.29 |
| |
|
|
|
| |
|
$ |
9.30 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL RETURN(2) |
|
|
|
22.93 |
% |
|
| |
|
|
(6.49 |
)% |
|
|
|
|
| |
|
|
1.90 |
% |
|
|
|
|
| |
|
|
5.68 |
% |
|
|
|
|
| |
|
|
2.78 |
% |
|
|
|
|
|
|
|
|
| |
SUPPLEMENTAL DATA AND RATIOS: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Net Assets, End of Period (000’s) |
|
|
$ |
102,554 |
| |
| |
|
$ |
126,416 |
| |
|
|
|
| |
|
$ |
148,332 |
| |
|
|
|
| |
|
$ |
113,008 |
| |
|
|
|
| |
|
$ |
116,551 |
|
|
|
|
|
|
|
|
|
| |
Ratio of Expenses to Average Net
Assets: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Before
Expense Reimbursement/Recoupment |
|
|
|
1.80 |
%(3) |
|
| |
|
|
1.82 |
%(3) |
|
|
|
|
| |
|
|
1.88 |
%(3) |
|
|
|
|
| |
|
|
1.87 |
%(3) |
|
|
|
|
| |
|
|
1.86 |
%(3) |
After
Expense Reimbursement/Recoupment |
|
|
|
1.81 |
%(3) |
|
| |
|
|
1.80 |
%(3) |
|
|
|
|
| |
|
|
1.84 |
%(3) |
|
|
|
|
| |
|
|
1.82 |
%(3) |
|
|
|
|
| |
|
|
1.85 |
%(3) |
|
|
|
|
|
|
|
|
| |
Ratio of Net Investment Income (Loss) to
Average Net Assets: |
|
|
|
|
| |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Before
Expense Reimbursement/Recoupment |
|
|
|
8.98 |
%(3) |
|
| |
|
|
4.83 |
%(3) |
|
|
|
|
| |
|
|
4.57 |
%(3) |
|
|
|
|
| |
|
|
4.72 |
%(3) |
|
|
|
|
| |
|
|
4.61 |
%(3) |
After
Expense Reimbursement/Recoupment |
|
|
|
8.97 |
%(3) |
|
| |
|
|
4.85 |
%(3) |
|
|
|
|
| |
|
|
4.61 |
%(3) |
|
|
|
|
| |
|
|
4.77 |
%(3) |
|
|
|
|
| |
|
|
4.62 |
%(3) |
|
|
|
|
|
|
|
|
| |
Portfolio Turnover Rate |
|
|
|
31.98 |
% |
|
| |
|
|
25.70 |
% |
|
|
|
|
| |
|
|
28.45 |
% |
|
|
|
|
| |
|
|
50.26 |
% |
|
|
|
|
| |
|
|
21.85 |
% |
(1) |
Net
investment income per share has been calculated based on average shares
outstanding during the period. |
(2) |
Total
Return represents the rate that an investor would have earned (or lost) on
an investment in the Fund (assuming the reinvestment of all dividends and
distributions). |
(3) |
Includes
borrowing and investment-related expenses not covered by the Fund’s
expense limitation agreement. |
(4) |
Includes
less than $0.01 per share of return of capital. |
35
STONE
RIDGE’S PRIVACY NOTICE
Stone
Ridge’s Commitment to Privacy
Stone
Ridge recognizes and respects your privacy. This Privacy Notice describes the
types of personal information we obtain, how we use that information and to whom
we disclose it. Non‑public personal information means personally identifiable
financial information that is not publicly available and any list, description
or other grouping of consumers (and publicly available information pertaining to
such consumers) that is derived using any personally identifiable financial
information that is not publicly available.
Stone
Ridge does not sell your non‑public personal information to any third parties.
Stone Ridge uses your non‑public personal information primarily to complete
financial transactions that you request or to make you aware of other financial
products and services offered by Stone Ridge or its affiliates.
Information
Stone Ridge Collects About You
Stone
Ridge collects the following categories of non‑public personal information about
you:
|
• |
|
Information
that you provide, which may include your name and address, social security
number or tax identification number, date of birth and/or other
information; |
|
• |
|
Information
about transactions and balances in accounts with Stone Ridge or its
affiliates; |
|
• |
|
Information
about transactions and balances in accounts with non‑affiliated third
parties; and |
|
• |
|
Information
from consumer reporting agencies. |
How
Stone Ridge Discloses Your Personal Information
Below
are the details of circumstances in which Stone Ridge may disclose non‑public
personal information to third parties:
|
• |
|
In
order to complete certain transactions or account changes at your
direction, it may be necessary to provide certain non‑public personal
information about you, such as your name, social security number or tax
identification number or date of birth, to companies, individuals or
groups that are not affiliated with Stone Ridge, such as administrators,
custodians, transfer agents, accountants, attorneys and broker-dealers.
|
|
• |
|
In
order to notify you about other financial products and services that a
Stone Ridge affiliated company offers, Stone Ridge may share non‑public
personal information it has about you, such as your name, contact
information or information about transactions and balances in accounts
with Stone Ridge or its affiliates, with a Stone Ridge affiliated company.
|
|
• |
|
In
certain instances, Stone Ridge may contract with non‑affiliated companies
to perform services for or on behalf of Stone Ridge. Where necessary,
Stone Ridge will disclose non‑public personal information it has about
you, such as your name, social security number or tax identification
number or date of birth, to these third parties. In such cases, Stone
Ridge will require the third party to use the information only for that
purpose. In addition, Stone Ridge requires these third parties to treat
your non‑public information with the same high degree of confidentiality
that Stone Ridge does. |
|
• |
|
Finally,
Stone Ridge will release non‑public information about you if directed by
you to do so or if Stone Ridge is authorized by law to do so, such as with
respect to the investigation or assertion of legal rights, in connection
with a corporate transaction involving Stone Ridge or in compliance with
legal or regulatory obligations. |
36
How
Stone Ridge Safeguards Your Personal Information
Stone
Ridge restricts access to non‑public personal information about you to its
employees and to third parties, as described above. Stone Ridge maintains
physical, electronic, and procedural safeguards reasonably designed to protect
the confidentiality of your non‑public personal information.
Keeping
You Informed
Stone
Ridge reserves the right to modify this policy at any time and will keep you
informed of further changes as required by law.
37
USEFUL
SHAREHOLDER INFORMATION
Trust.
Stone Ridge Trust consists of three series. The series are investment
portfolios of Stone Ridge Trust, an open‑end series management investment
company organized as a Delaware statutory trust.
Shareholder Reports. Annual and semi-annual reports to shareholders
provide additional information about the Fund’s investments. These reports
include financial statements, a discussion of the market conditions and
investment strategies that significantly affected the Fund’s performance, as
well as the auditors’ report (in the annual report only).
Statement of Additional Information. The
Statement of Additional Information provides more detailed information about the Fund. It is incorporated
by reference into (and is legally a part of) this combined prospectus.
How to Obtain Additional Information.
• |
|
You
can obtain shareholder reports or the Statement of Additional Information
(without charge), make inquiries or request other information about the
Fund by contacting the Transfer Agent at (855) 609‑3680, writing the
Fund at Stone Ridge Trust, c/o U.S. Bank Global Fund Services, 615 East
Michigan Street, Milwaukee, Wisconsin 53202, visiting the Fund’s website
at www.stoneridgefunds.com or calling your financial intermediary.
|
• |
|
You
may review and copy information about the Fund, including reports and
other information about the Fund, on the EDGAR Database on the
Commission’s website at www.sec.gov. You may get copies of this
information, with payment of a duplication fee, by electronic request at
the following E‑mail address: [email protected]. You may need to refer to
the Fund’s file number. |
If
someone makes a statement about the Fund that is not in this prospectus, you
should not rely upon that information. Neither the Fund nor the Distributor is
offering to sell shares of the Fund to any person to whom the Fund may not
lawfully sell its shares.
How
to Reach Stone Ridge Trust
Please
send all requests for information or transactions to:
Stone
Ridge Trust
c/o
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202
You
may contact us by telephone at (855) 609‑3680.
You
can also visit our website at:
www.stoneridgefunds.com
Distributor
ALPS
Distributors, Inc.
1290
Broadway, Suite 1000
Denver,
Colorado 80203
Investment
Adviser
Stone
Ridge Asset Management LLC
One
Vanderbilt Avenue, 65th Floor
New
York, NY 10017
Investment
Company Act File Number: 811-22761