An important risk management strategy often overlooked by many investment managers is key man insurance for hedge funds. Many of the nation’s most successful hedge funds depend heavily upon one “manager” to make crucial investment decisions. As such, the funds attractiveness and ultimate returns hinge upon it’s leaders ability to perform. That’s why key man insurance is so important.
Each year Americans allocate billions of dollars into hedge funds essentially trusting wholeheartedly the investment acumen of the “Superstar” decision maker. Since most hedge funds are not well diversified with respect to their highest-level key people, there is considerable risk associated with the loss of an investment expert. For this reason, any investor considering a hedge fund should verify that the fund carries key man life and disability insurance on its key investment gurus. Likewise, hedge funds that have an over-reliance on a single “rainmaker” should always look to protect the fund from the very real threat of death or disability to its star performer.
Many hedge funds have specific clauses in their investment agreements that limit an investor’s ability to get out of the fund abruptly. Some funds allow for quarterly liquidation rights but most redemption privileges are highly restrictive. The poses a serious risk to the investor in the event of the death or disability of the hedge fund manager. Hence, the need for key man insurance for hedge funds.
The solution to the dilemma and the best way to protect both the investor and the hedge fund is to acquire key man life and disability insurance on the fund “Superstar”. In most cases, this is not a difficult task as there are many insurance companies that offer key man life policies at very affordable rates for substantially large face amounts. However, in some instances, the amount of key man life coverage needed may exceed the limits of traditional insurance providers. In these cases, a custom designed high-limit key man life policy from Lloyd’s of London can be purchased to cover the balance of the risk.
As for key man disability insurance, it can be a little more difficult as there are relatively no “traditional” underwriters of key man disability coverage. However, in most cases, Lloyd’s of London can offer a high-limit key man disability policy that can adequately cover the risk. Like key man life insurance underwritten by Lloyd’s, key man disability policies are custom designed to fit the specific need and can be written in very large benefit amounts.
Companies of all sizes can be vulnerable to “Key Man Risk” associated with the death or disability of a top performer. Hedge funds are no exception and in fact may be more prone to excessive risk because of the dependence upon a single investment guru that drives the fund’s performance. Key man insurance for hedge funds is a perfect solution to mitigate the risk of loss of a irreplaceable fund manager. In most cases, policies can be purchased at affordable rates and without too many hassles.