Hedge fund managers are failing to take out adequate insurance against potentially ruinous claims, according to City law firm Reynolds Porter Chamberlain (RPC).
At its Annual Directors & Officers (D&O) insurance seminar, RPC warned that many hedge fund managers appear to be in a “state of denial” regarding their liability to the fund for losses arising from trading errors.
Fund managers can buy Errors & Omissions (E&O) insurance to protect against such exposures but many are failing to do so, say the law firm.
Rupert Boswall, Partner, of Reynolds Porter Chamberlain told the seminar: “Many fund managers do not seem to accept that trading errors should be viewed as negligent errors for which they are responsible even though investment management agreements make clear that the fund will not indemnify the manager for negligence.
“Unless there is an agreement explicitly stating that a hedge fund manager is indemnified by the fund against all liabilities, then it is the hedge fund manager rather than the fund that will have to pay out for any losses arising through negligent trading errors.”
Boswall said that in an industry driven by risk, the potential losses a fund manager may be liable for were huge.
RPC said the FSA has made it clear that the hedge fund manager is responsible as a matter of law for any trading errors, and that it is troubled by the apparent lack of recognition by fund managers of their legal responsibility.
The UK Hedge Fund industry trade body, the Alternative Investment Managers Association has requested “clarification on this matter”.
This clarification is expected soon from the FSA and is anticipated to re-affirm the liability of the fund manager.