Saturday, 27 August 2016
Last updated 9 hours ago
Jun 27 2012 | 1:08pm ET
Of life’s two inevitabilities, taxes can be mitigated with the help of a good lawyer but death comes to us all—even star investment managers.
The death (or, on a less dramatic note, retirement) of a star trader can wreak havoc on an asset management firm, according to the SKCG Group, which is why insurance companies wrote an estimated 10% more “key man” policies in 2011 than in 2008.
“Hedge funds are unique,” said David Parker, president of the SKCG's employee benefits division, in a statement: “Their ‘product’ is achieving positive returns and that product is often completely dependent on the intelligence and skill of one or more individuals within the firm. If a fund loses one of those individuals, the next step is often the dissolution of the company. Key man insurance can make the difference between an orderly wind down and a chaotic one.”
According to SKCG, pressure from institutional investors has been a driving force behind the increase in key man policy sales. 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,” said Parker.
Top level hedge fund executives, whose earnings can be closely linked to the fortunes of a fund manager, are also driving demand, according to SKCG.
“Hedge fund employees are realizing this aspect of risk and they’re looking for more security,” said Parker, “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,” he adds.
The growth in popularity of ‘key man’ insurance may be part of a larger trend toward insurance in the hedge fund industry. A recent poll by the London-based risk consultancy Baronsmead found that 82% of hedge fund managers carried professional indemnity insurance, up from 64% from 2010. Moreover, 93% of hedge fund directors are covered by directors’ and officers’ liability insurance.