Hedging for when the guru dies
Many of the key people running hedge funds are ageing and investors are looking to insure against the possibility of untimely death by making the hedge funds take out key man risk insurance covering their most senior investment gurus, according to new data emerging from the US.
Major US insurance and risk management advisory firm SKCG estimates insurance companies wrote 10 per cent more key man policies last year compared to 2008.
It said the existence of such insurance cover had become one more item on the institutional investors' check-list.
According to SKCG employee benefits division president David Parker, investors aren't trying to insure against the loss of the manager so much as they are seeking to protect their investment by promoting an orderly transition or dissolution of the fund.
"They worry about the time it takes to unwind illiquid investments, while other demands on the funds' cash continue, such as paying rent and vendors. Cash from key man insurance can go a long way towards alleviating those concerns," he claimed.
The SKCG analysis suggested that top-level hedge fund executives were also driving the demand for cover.
It said such people had often left secure jobs for positions at hedge funds where year-end bonuses were important contributors to their compensation.
"If something happens to the fund manager, they may not get them," Parker said.
"Hedge fund employees are realising this aspect of risk and they're looking for more security," he said. "They know that if a key man insurance policy is in place to provide liquidity for the firm, they are going to be in a better position as they seek new opportunities."
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