How Key Man Insurance Plays a Role in Investor Due Diligence

Key Man insurance. Morbid, but quite necessary; especially when it comes to hedge funds.

In a press release published Monday by risk management and insurance advisory firm SKCG, an arising issue in the hedge fund industry was confronted: Over $600 billion of assets are currently allocated into hedge funds whose managers will cross the 60+ line within the next decade. Basically, though they may seem immortal, illustrious hedge fund managers are still in fact perishable.

David Parker, President of the employee benefits division at White Plains, NY SKCG explains how the uniqueness of hedge fund products can be seen in that the positive returns generated are usually a result of its manager’s intelligence and skill. In the event of this ‘key man’ passing away, a disorderly company dissolution is often just a few steps behind.

The biggest factor in the recent surge of key man insurance popularity is the appeal it has to investors. While conducting their due diligence, an investor seeing that a hedge fund manager has insurance of this kind will inevitably work in the managers favor. If something does happen to them, the investor will be left to deal with an unmanaged fund and all the complexities that accompany it.  Things like unwinding illiquid investments while maintaining needed cash flows are all realities that need to be considered, and key man insurance can come in clutch in this situation.

A recent report by KPGM and the Alternative investment Management Association entitled The Evolution of an Industry, demonstrates how the hedge fund sphere is experiencing an increase in demand from institutional investors calling for more transparency. After conducting 150 interviews with hedge fund management firms world wide, the report gathered that over half of their AUM come from institutional investors. The report also states that the amount of time managers spend handling due diligence questions from institutional investors has doubled since 2008.

With this strong of an influx in institutional investor allocations, complying with their demands would definitely be in a hedge fund manager’s best interest. So having one more requirement that they’re able to check off an investor’s due-dil list could mean the difference between getting a new sizeable allocation and not.

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