Don't worry, be happy.
That's much easier now that someone has figured out a better way to insure investors against hedge fund fraud. Insurance broker and risk manager Integro Ltd., New York, was approached by an institutional investor who asked for just that — real protection of their assets from seizure by a governmental or regulatory agency for real or alleged fraud by a hedge fund manager.
With an estimated $9 billion of fraud-related losses occurring over the past decade by hedge fund executives like Samuel R. Israel III, founder of Bayou Management LLC, Integro officials thought the institutional market was ready to protect itself, said Michael Klaschka, managing principal and head of Integro's financial institutions practice.
If the hedge fund's assets are seized by the feds for real or alleged fraud, the insurance policy covers the investor against potential asset loss and reputation risk by paying the policyholder's investment in a hedge fund within 90 days of a seizure. Other hedge fund insurance policies don't pay until the manager's guilt has been established in a court, which often takes three to five years, Mr. Klaschka said.
Integro's underwriting process includes an evaluation of the operations of the hedge funds within a client's portfolio and how safe they are. Integro teamed up with Amber Partners (Bermuda) Ltd., Hamilton, a hedge fund due diligence specialist, which is handling the review of hedge fund operations. While the price will vary widely depending on the size of the investment and funds within a client portfolio, Mr. Klaschka said the average cost of the insurance will be about 20 basis points of the client's total hedge fund portfolio.
Mr. Klaschka said executives at pension funds, endowments, foundations, hedge funds of funds and family offices expressed a lot of interest in the fraud insurance since it hit the market about a month ago. — Christine Williamson
