The presence of illiquid and hard-to-value assets in hedge fund portfolios could expose fund directors to enhanced legal risks as they prepare to sign off 2007 annual reports at the end of
The presence of illiquid and hard-to-value assets in hedge fund portfolios could expose fund directors to enhanced legal risks as they prepare to sign off 2007 annual reports at the end of this financial quarter.
According to specialist hedge fund insurance broker Baronsmead, a director on the boards of a fund, through commitments in a fund’s prospectus, are potentially taking on personal liability for the fair valuation of highly illiquid assets and should seek adequate insurance cover.
The asset values of the funds will be crystallised at the balance sheet date and the directors will need to confirm that the accounts give a true and fair value of the fund. The independent auditors will need to agree with the directors’ opinion or the fund’s accounts could be qualified.
‘The recent credit crisis in markets has made it even more difficult for administrators to provide fair valuation for some of these instruments,’ says Robert Kelly, managing partner of Baronsmead Insurance Brokers.
‘With the explosive growth in the use of OTC derivatives by hedge funds, directors are facing heightened personal risk, since they have overall responsibility for the operation of the fund’s asset pricing policy and the values of illiquid portfolios.’
The demand for professional indemnity policies for fund managers, as well as insurance cover for directors, is increasing as fund professionals face the prospect of increased litigation from disgruntled investors. These investors could include pension funds which might be more likely to bring lawsuits against directors because of the trustees’ fiduciary obligations.
Directors of non-US funds with a large proportion of their assets sourced from the US are being warned by Baronsmead to be particularly aware of their insurance arrangements, as it is perceived that there is a stronger possibility of active US investor litigation against fund directors this year.
Robert Kelly concludes: ‘While there is an enhanced risk of litigation against fund directors, and managers, we think it is important to differentiate between the US and European experience. Just because the insurance industry is largely controlled by US capital, we still want our European clients to be treated fairly by insurance companies, and not charged for risks they are not facing.’
Baronsmead Partners offers a range of financial risks insurance for both traditional and alternative funds and their investment managers. It is regulated by the UK Financial Services Authority to sell general insurance products and it is a member of Lloyd’s of London. Baronsmead Partners Ireland is a branch of Baronsmead Partners.
Under the Insurance Mediation Directive Baronsmead is passported to provide insurance and reinsurance mediation services within the European Economic Area.
