Risky Business: HFs Are Underinsured

Hedge funds make their money taking risks, but one they shouldn’t tamper with is insurance, says BestWeek. The insurance industry newsletter, which says a hedge fund’s rapid growth in addition to industry-related business risks contribute to its having not enough of the right insurance. Some funds, it says, have no insurance at all. “What I hear from agents is that the hedge fund managers don’t think the insurance is worth the premium,” Kellie Varden of Chubb Specialty Insurance Co., told BestWeek. “Many won’t buy until a client that’s investing with them mandates it.” Michael Zeldes of Hub International Northeast says HFs likely will take out property insurance, but as for other coverages such as errors and omissions, directors and officers, and the like, “they might not have the time or focus to say that’s more important than chasing the next deal or investor.” Which can be unfortunate, if the hedge fund gets sued. These days the most common charges lobbied against a hedge fund is fraud. Prompting such charges, says the newsletter, is the fact that HF managers, in an effort to produce the best results, may suffer from “style drift” or morphing, which leads them into acquiring financial instruments that leave clients unhappy, and willing to sue for breach of fiduciary duty.