Hedge fund insurers profit from credit crunch

LONDON (Thomson IM) - Insurance may not be the top priority for hedge fund managers but investor lawsuits over funds hit hard by the credit crunch are helping to drive it up the boardroom agenda, according to an executive from specialist insurers Howden Risk Partners.

Speaking to Thomson Investment Management News, Ed Brennan, business development manager for Howden, said: 'If you were to put everything in a list [insurance] would come reasonably far down but it wouldn't be last.

'I would say that in the last few years it's been a box to be ticked; but that box has become more important over the past eight to nine months.'

Brennan said that the most noticeable effect of the credit crunch has been the increasing number of directors who were joining the board of a hedge fund only if sufficient insurance cover was place.

'They are seeing it now as a necessity, particularly with [UK financial regulator] the FSA and the general public taking more of an interest in the hedge fund space.'

London-based Howden is a provider of insurance arrangements for both traditional and alternative asset managers, with policies including specialist wordings that encompass the risks to which hedge funds are regularly exposed.

Aside from the failure of a fund itself, Brennan said the main risk for hedge funds are litigation costs - either from disgruntled investors or a regulatory body.

In one example last month, a Florida-based investor filed a lawsuit against Citigroup over its Falcon Strategies Two B LLC hedge fund which lost over 40 percent of its value in the credit crunch.

In February, Citi provided a $500 million line of credit to bail out the Falcon line of funds and consolidate their $10 billion in assets and liabilities on the bank's own balance sheet.

Specialist insurance, which is not compulsory, can cover the directors of the fund and the management entity with an excess ranging from $1 million to $50 million.

'We are seeing an increase in start-ups enquiring and employing this sort of insurance. But we also still get enquiries from funds that have been running for years and London-based management entities that have been trading for 20 years,' Brennan said.

Brennan's firm is due to launch a new insurance product covering directors and officers liability this summer.

It isn't just hedge funds themselves that can get cover - earlier this year, Protean Investment Risks launched an insurance policy for hedge fund investors, offering cover for losses that are a direct consequence of fraudulent actions by a fund manager or any other hedge fund employee.

Howden Risk Partners was set up five years ago and is part of the Hyperion Insurance Group. Private equity firm 3i Group Plc. last month took a minority shareholding, valuing Hyperion at more than 120 million pounds.

By Joyanta Acharjee: +44 (0) 20 7422 4928; joyanta.acharjee@thomsonreuters.com; www.thomsonimnews.co.