Poor management and settlement of insurance claims remains one of the biggest concerns for hedge fund managers, according to Baronsmead Partners LLP, the specialist financial risks insurance broker, which has published its Hedge Fund Insurance Benchmarking Trends 2012 Survey.
Some of the main problems identified by managers include delays in claims payment due to the structure of the policy. Managers also took issue with excessive exclusions and the outsourcing of claims handling to a third party / regional office.
Another key finding is 82% of hedge fund managers said they purchased Professional Indemnity (PI) insurance, compared to 2010 when only 64% of hedge fund managers took out the cover. The AIFM directive has been one of the main drivers behind this current trend however most managers already purchase more than the minimum recommended limit of 1% of AUM. Managers also stated that PI was now a requirement demanded by more and more investors.
The purchase of insurance by Directors continues to rise with 93% now covered by D&O insurance. The Weavering case and the inclusion of Irish and Luxembourg fund directors in US litigation arising from Madoff exposures, has highlighted the importance of purchasing quality policies to ensure coverage in the event of a claim.
Raising money and performance returns were identified as top priorities for managers in 2012. Ultimately, investors are intent on seeing positive returns and the ability to generate these along with raising new capital will have a significant impact on hedge funds in the coming year.
Managers consider the likely impact of the AIFM directive and US regulation as being relatively low. Virtually all managers acknowledge that it would significantly increase costs for both the custodian and themselves. However regulatory breaches is where insurers see the most potential claims arising in the future, following the raft of new regulation coming into force.
Shyam Moorjani, Managing Partner, commented:
“Our report confirms that there is genuine concern by hedge fund managers in getting claims paid. The key to helping achieve this is a properly structured policy with insurers that have a good track record of paying a valid claim.”
Robert Kelly, Senior Partner, added:
“It is no great coincidence that more and more managers are taking out PI and D&O Insurance. While there is no major panic around the AIFM directive being implemented, managers are worried about some of the knock-on effects it might have on their businesses. With the Weavering Capital case still fresh in the memory, many investors are insisting that the fund directors and the fund itself are adequately covered.”
The report summarises survey feedback from a total of 120 hedge fund managers from London-based hedge funds with combined assets under management of over USD200 billion. The report also contains responses and comments from 9 of the leading hedge fund insurers.
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