Tue, Feb 28, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Largest hedge funds buy more, pay less for protection against SEC and investor lawsuit costs

Tuesday, May 03, 2011

Wayne Siebner
Large hedge funds with over $10 billion in assets under management (AUM) typically purchase $40 million or more in professional liability insurance coverage, nearly 200% more than medium funds between $1 billion and $3 billion in AUM according to a benchmark study by SKCG Group, the risk management and insurance advisor to some of the world’s largest hedge funds. The study of 250 hedge fund liability insurance purchases also revealed that, dollar for dollar, the bigger funds pay less for their coverage. This, coupled with a more strenuous regulatory environment and heightened investor expectations, is making it impractical for these larger funds to self insure – that is, pay out of pocket – for the costs of trading errors, investor and SEC lawsuits and investigations.

“Before the financial crisis, it wasn’t uncommon for large hedge funds to just eat the costs of investigations and lawsuits resulting from trading errors and other mistakes. This simply doesn’t make sense anymore when the price of insurance against these costs has declined by as much as 20% in the last 2 years and is even more inexpensive to the largest funds who buy higher limits,” said Wayne Siebner, Senior Vice President and Manager of Executive and Professional Liability for SKCG Group.

The secret behind the favorable pricing for big hedge funds lies in the special way that policies over the typical $5 to $10 million in face value are underwritten. When a fund needs a larger amount of protection, special programs are created which layer coverage from multiple carriers. One carrier will assume the risk for the first $5 to $10 million while another will assume the risk for the next $5 to $10 million, and so on. Naturally, the premiums paid to the insurer of secondary and tertiary layers are less than that of the primary layer because that coverage is less likely to be drawn upon. This means that a large fund which purchases $40 million in protection may have as many as 7 carriers underwriting those limits with each carrier getting paid less than the one before it based upon the order in which they assume risk.

“Other than favorable pricing, the second factor driving large funds to purchase E&O/D&O coverage is investor demand. Years ago, if a trader made an error the fund would simply incur the loss and try to make it up somewhere else. Investors aren’t having that anymore, nor are they keen to have defense costs for lawsuits and investigations come out of their potential returns,” added Thomas R. Kozera, CEO of SKCG Group. “This means that today, seeing that a fund is properly insured is gaining rapidly in priority on investors’ due diligence check lists.”

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Institutional investors plan to raise allocations to alternative assets in 2017[more]

    Komfie Manalo, Opalesque Asia: A survey by Context Summits Miami showed that nearly 72% of institutional investors and family offices plan to raise their allocations to alternative asset managers this year, suggesting continued strong demand for the industry. "As many large, brand name f

  2. Comment - Mortgages, mergers and hedge fund fees, Fairholme's Berkowitz responds to court ruling against hedge fund suits of Fannie Mae[more]

    Mortgages, mergers and hedge fund fees From Bloomberg.com: Yesterday the U.S. Court of Appeals for the D.C. Circuit handed down an odd decision in a lawsuit over the government's nationalization of Fannie Mae and Freddie Mac. The key issue is what's called the "Third Amendment," the 2012

  3. Investing - Hedge funds continue to chase the herd in record Momentum wager, Marshall Wace bets grocer Sainsbury may need rights offering, Hedge fund net exposure has started to retreat, David Tepper's Appaloosa fund makes a huge buy, The 10,000-mile journey to Short Australia, Skeptical hedge fund investors grill Evan Spiegel about Snap's I.P.O.[more]

    Hedge funds continue to chase the herd in record Momentum wager From Bloomberg.com: Hedge funds can't get enough of momentum - even if it means embracing an investing strategy they hate. Loosely defined as betting on shares that went up the fastest over the preceding nine-to-12 months, h

  4. Opalesque Exclusive: Swiss investors take fund seeding and acceleration into their own hands[more]

    Benedicte Gravrand, Opalesque Geneva: Banque Bonhote, a 200-year old Swiss private bank, last year launched a community of investors - heads of Swiss family and advisory offices and wealth managers - with the aim of co-investing in the kind of managers they wanted to invest in, either by way of s

  5. K2 Advisors : Why We Like Activist Hedge Fund Strategies and Some Thoughts on Alpha[more]

    Matthias Knab, Opalesque: Rob Christian, Senior Managing Director, Head of Research K2 Advisors, Franklin Templeton Solutions, writes on Harvest Exchange: When d