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While convicted fraudster Bernard Madoff sits in jail awaiting sentencing for the largest investment fraud in Wall Street history, court actions against financial institutions and fund directors for breaches of their fiduciary duties and negligence are dominating the headlines. Madoff is thought to have taken in around $65 billion over two decades and litigation and liability are now inevitably pervasive.

Executing an investment strategy in this environment is challenging enough, but current levels of volatility have created additional difficulties and exposures. From the increased impact of errors to valuation issues and the accompanying rise in litigation risk, fund managers and directors find themselves more exposed.

Baronsmead Enhances Protection against Litigation for Independent Directors in Ireland

Dublin, London – 27th June 2008: Baronsmead Partners Ireland (“Baronsmead”) - the specialist fund insurance broker - today announces the launch of a new Directors’ and Officers’ Liability insurance product that will better protect independent fund board directors and officers in Ireland against the increasing risk of litigation.

Baronsmead Partners Ireland, the fund insurance broker, has launched a directors’ and officers’ liability insurance product that hopes to protect independent fund board directors and officers in Ireland against the increasing risk of litigation.

Th. U.K Financial Services Authority’s recent clampdown on short-selling has provoked outrage across the hedge fund industry. Under the new rules, which came into effect on Friday, parties will be required to disclose any net-short position of 0.25% or above that they hold in a company conducting a rights issue. In a statement released on June 13, the FSA supports the move as a way of “preventing the potential for abuse.”

Baronsmead Insurance Brokers, the specialist insurance broker to alternatives firms, is planning to open offices in the Channel Islands, the Caribbean and Continental Europe in the next twelve months. The firm has chosen these three hedge fund hubs because insurance is becoming of greater importance to fund managers, Founder Robert Kelly told AIN. The offices will be sales and marketing posts, with most of the advisory activity remaining centralised in London, he added. The firm is looking to hire a small number of people in each office, with a background in either fund management or insurance, said Kelly.

As the credit crisis slowly peters out, hedge fund directors and managers are still scrambling to check the quality of their indemnity and insurance policies. Demand for such policies has been steadily rising, according to the specialist hedge fund insurance broker Baronsmead.

The stunning losses at France's Société Générale, prompted by rogue trader Jérôme Kerviel, underline a major risk faced by all investors: fraud.

Pension funds are increasingly playing a more active role as investors in alternative assets, as reflected in recent figures released by Hedge Fund Research (US$194 billion of new money into hedge funds last year), the recent credit crunch is, we believe, throwing up new risks which pension funds have to consider.

Based in London and Dublin, Baronsmead are specialists in hedge fund insurance, providing funds and their managers with Financial Risks Insurance covering both personal and corporate liability. We look to give expert advice on how these products can be used to mitigate against regulatory, legal and operational risks. Baronsmead strives to ensure we review the impact of UK and European legislation and regulation in the hedge fund industry which may affect our clients’ exposure. A recent example would be the impact on hedge fund managers’ capital requirements within the Capital Requirements Directive. Our analysis will allow our clients to use their insurance programmes to partially offset the operational risk capital requirement under the directive. We are fully engaged with the hedge fund industry and are members of AI MA’s Sound Practices Committee.

The arrival of boutique insurance firm Baronsmead on the hedge fund stage has signalled an opportunity for managers to purchase extra peace of mind for themselves, via policies specifically tailored to the demanding requirements of their industry. The firm has been founded by Robert Kelly, an underwriter who was looking for a market that was misunderstood by the insurance industry, where he felt he might be able to make a difference. Baronsmead has been steadily carving itself a niche in the hedge fund marketplace as an insurance broker specifically geared to place business for hedge fund managers, and has benefited from a lack of other brokers working in this area.

‘Absolute return’ managers, who promise to make money in both bull and bear markets, have generally been the preserve of high net worth investors and a smattering of banks. However, with the advent of ‘A Day’ in April this year, when the government opened up the market for self-invested personal pensions, several insurers, brokers and law firms began to push the issue of hedge fund liability to the top of the agenda. Some suggested that this market – should it begin accepting retail investment – would be exposing itself to untold levels of claims and litigation with the vast majority of managers having no insurance to protect them.

Leading Russian investment bank and asset manager Troika Dialog has gone live with its Troika Russia hedge fund, launching this month with initial assets of $40 million.

Insurance group ACE European Group has joined the growing line-up of insurers providing specialist cover for the investment management sector - developing a specialist insurance policy that incorporates professional indemnity, directors & officers (D&O) and crime cover specifically for fund management groups.

The Insurance risk of hedge funds is low and this should be reflected in the insurance policy cover they are offered and the premiums they are charged.

Insurance risk is simply the likelihood of the hedge fund group incurring a legal liability and making a claim on their Professional Risks Insurance policy.

Professional Risks Insurance covers the individual s personal liability, hedge fund and manager corporate liability and general partnership liability.

If it walks like a duck, talks like a duck and your friendly insurance broker tells you it’s a duck, then you can bet your bottom dollar the bird in question is a duck – or maybe not. For when it comes to financial risks insurance – and directors and officers liability insurance in particular – there’s a whole range of waterfowl out there. Some policies may be swans but many are ugly ducklings.
Directors and officers liability insurance provides protection against the wrongful acts of directors. It’s a complex but crucial area and the right guide is essential. The principal watchwords are Caveat Emptor.
The cost of directors and officers liability insurance has increased sharply in recent years – in come cases by hundreds of percent – and its profile within the investment trust sector has risen accordingly. The sector itself has seen a period of upheaval with rapid expansion during the last bull market followed by the well-publicised problems affecting certain split capital investment trusts.
The response from some investment trusts to rising insurance costs has been to settle for lower policy limits. Others have chosen or been forced to forgo directors and officers liability insurance cover completely. Both strategies are high risk. A failure to buy adequate and suitable insurance can easily prove to be a catastrophic false economy.