Sat, Jul 2, 2016
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. Investing - Soros, Druckenmiller among hedgies profiting in market plunge, Hedge funds were most bullish on bonds since 2004 before Brexit, Surprise Brexit vote unleashes scramble for dollars, High-yield hit on Brexit but no panic selling, Scientist turned hedge fund founder lured to pound, euro, Hedge fund avoids commodities, posts big gains[more]

    Soros, Druckenmiller among hedgies profiting in market plunge From HITC.com: Bullish positions in gold and volatility and well-timed short bets on China and emerging markets, among other areas, were some of the trades that benefited hedge funds on Friday as markets digested Britons' s

  2. Manager Profile - A 26-year old hedge fund manager called Brexit — here's what he thinks about the historic vote[more]

    From Businessinsider.com: Taylor Mann is not your typical fund manager. The twenty-six year old Texas A&M graduate manages Pine Capital in Larue, Texas (population 160), where he resides with his three-year old daughter. Also atypical compared with many of the largest funds out there, Mann makes

  3. Chesapeake Partners to liquidate hedge fund amidst 'hostile environment'[more]

    Komfie Manalo, Opalesque Asia: Chesapeake Partners Management, the hedge fund run by woman fund manager Traci Lerner said it would return investors’ money after 25 years because the market environment has become "hostile" to manage other people’s money, reported

  4. Europe - George Soros says Brexit has ‘unleashed’ a financial markets crisis, Brexit—what we know, Will the UK’s departure be a ‘soft-Brexit’ or a ‘hard-Brexit’?, Brexit: Six-point action plan for asset managers[more]

    George Soros says Brexit has ‘unleashed’ a financial markets crisis From Bloomberg.com: Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Bruss

  5. Hedge Fund Due Diligence Exchange offers complete due diligence reports at $1500[more]

    Matthias Knab, Opalesque: HFDDX is offering complete alternative investment due diligence reports at $1500 US. Industry professionals can simply go to www.hfddx.com and indicate their interest in sponsoring one or more DD Reports for $1500 each.