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Thursday, 8 December 2016
Last updated 14 hours ago
Dec 15 2005 | 5:32pm ET
American International Group launched an insurance product this week aimed at protecting hedge fund managers, directors and officers against liability and potential litigation. According to industry experts, this is the first time an insurance product has been specifically created for and marketed to hedge fund managers, but while AIG thinks the product will be a big hit, some managers are skeptical that it will take off.
Maurice Berkower, CPA and hedge fund advisor with Acquavella, Chiarelli, Shuster, Berkower & Co., said “It’s a product that probably belongs in the marketplace. I just don’t know how receptive the market will be to it.”
He added that because of the cost and questions over whether a hedge fund manager would have to disclose the insurance to his or her clients, he believes that “only very, very large managers would possibly go for it.”
Scott Meyer, president of National Union’s Financial Institutions Group, the subsidiary of AIG offering the new product, disagrees. “I think hedge funds have seen what has happened in the mutual fund world. They’ve seen what has happened in general in corporate America. And with new regulation on the horizon, they’ve asked us in large numbers to come up with protection specifically for them, and we have.”
He said that less that 30% of hedge funds currently have some sort of directors and officer or errors and omissions insurance, and he expects that based on the interest he has seen, that number will double by the end of next year. Meyer attributes this increase in demand partly to the upcoming laws that will require hedge funds to register with the Securities & Exchange Commission.
But what exactly will this type of insurance cover? Meyer explained that it protects directors, officers and the fund against any error or omission committed while carrying out a defined obligation where they earn a fee. Allegations that a wrongful act has occurred would be covered, but final adjudicated fraud or other crimes would not be.
For example, if a hedge fund manager committed fraud, the insurance would cover the manager’s defense up until the time the manager was convicted of fraud. At that point, National Union would seek the amount of money that it had reimbursed the manager for during his defense.
David Kurzman, managing partner of New York-based hedge fund Kurzman Partners, also has his doubts about hedge fund insurance. “It would seem to me that it’s a very expensive thing to protect against,” said Kurzman. “I don’t think that it is the kind of thing that we are going to use here because we are not using leverage and we’re keeping our fund conservative.”
In addition to covering the cost of litigation, the insurance— called Hedge Fund Protector—includes automatic coverage for newly-formed hedge funds that have the same investment personnel as the existing funds, and options for separate cover, including employment practices liability, “Side Pockets”—private equity/venture capital professional liability, administrator liability and plan assets fund liability.