"Key Man" Risk in Hedge Funds Increases as Star Managers Age

Fall Issue of aiCIO: The demise, departure, death and decay of the first generation of hedge fund managers

Sep 12, 2011, 10:56 ET from Asset International

NEW YORK, Sept. 12, 2011 /PRNewswire/ -- As the first generation of hedge fund leaders grows older, investors are increasingly exposed to key man risk and may be prudent to avoid an over-reliance on ageing star managers, according to the latest issue of aiCIO.

"All asset classes are vulnerable to key man risk, but this hazard is especially common at hedge funds," said aiCIO editor-in-chief Kip McDaniel. "Father Time slows down for no man, and it will be interesting to observe how well firms like Bridgewater, Moore Capital, Tudor Investment and Citadel ultimately survive their high-profile founders."

This sentiment is echoed by Fordham adjunct professor of Finance, Kevin Mirable, who told aiCIO, "A lot of successful hedge funds are on the precipice, and on a case by case basis it is an open question whether investors will want to invest with the next generation."

For hedge fund investors, matters are further complicated when founders have provided no indication when they might retire. "It been decades since the inception of the world's largest funds, and many are still headed by the individuals who founded them," said McDaniel. "Even if that manager is still sharp and remains in good health, investors are justified in expressing more concern at the passing of every year."

The latest issue of aiCIO cautions that asset owners may be barred from redeeming their investment in a timely manner if the head of a fund leaves abruptly. Not all hedge funds offer key man redemption provisions and most have lock-up periods that can range from monthly to annually. Mirable cautions aiCIO that even a fund that allows monthly redemptions may need additional time to properly unwind its investments. Moreover, investors should be aware of key man provisions that the manager may have granted to other investors. It is rarely optimal to be the last investor allowed to exit.  

McDaniel reports that it can be difficult to assess the degree to which a key man contributes to a fund's decision-making process. It also can be tricky to gauge the effectiveness of a management structure a fund has put in place to reassure investors. Succession plans are not easy to evaluate either, according to McDaniel. "Founders often have a tendency to monopolize the oxygen within a firm, which can make an orderly succession difficult at best," he commented.  He gives Larry Fink high marks for successfully institutionalizing BlackRock.

About aiCIO
A quarterly online publication, aiCIO focuses on the 5,000 largest pools of capital in the world, across pension plans, sovereign wealth funds, endowments, foundations, insurance funds and other leading institutional investors. aiCIO is edited by Kip McDaniel.

About Asset International
Asset International is a privately-held provider of information and technology to global pension funds, asset managers, financial advisers, banking service providers, and other financial institutions in the private and public sector. Its industry-leading brands include Strategic Insight, SIMFUND, Plan For Life, PLANSPONSOR, PLANADVISER, aiCIO, Global Custodian, and The Trade. The company has offices in New York, Hong Kong, London, Melbourne and Stamford, CT.  For additional information please contact Nevin Adams at nadams@assetinternational.com.

SOURCE Asset International