Asian Hedge Funds Lag in Insurance Protection, Citigroup Says

Asian hedge fund managers’ insurance protection against legal claims for professional wrongdoings lags peers in the U.S. and Europe, according to Citigroup Inc.

Sixty-four percent of 47 managers that run Asia-focused funds in Hong Kong, Shanghai, Singapore, Australia and the U.S. own policies including directors’ and officers’ liability, and professional indemnity, according to a survey by Citigroup. That compared with more than 80 percent of European hedge funds in a similar survey last year by Baronsmead Partners LLP.

Asian hedge funds are seeking better insurance protection after the 2008 financial crisis unleashed a rush of legal claims globally and in response to demand from their professional fund directors and investors. Harbinger Capital Partners LLC and Tiger Asia Management LLC were among hedge funds slapped with regulator lawsuits for wrongful acts after 2008.

“The adoption of management liability insurance by hedge fund managers in Asia-Pacific is being driven by an increasing understanding of personal financial liability associated with potential litigation,” David Stanbridge, vice president of Citigroup’s prime finance business advisory services in the region, said in an e-mail on Jan. 8. “Regulatory decisions provide additional impetus for managers to consider protection.”

Early Protection

Asian hedge-fund managers founded after 2008 on average bought initial coverage less than five months after their inception, according to the Citigroup survey, the first of its kind in Asia. That compares with 1.6 years for those that started from 2002 to 2008 and seven years for even older managers, the survey showed. All of the managers with assets of more than $500 million that were polled have bought such insurance.

Directors’ and officers’ liability protects policyholders against alleged wrongdoings, the survey showed. Professional indemnity helps pay for defense and damages in lawsuits for negligence. The survey also included insurance covering employee crimes and claims by workers for wrongful termination.

Eighty-two percent of European hedge-fund managers said they owned professional indemnity policies, according to a June survey by Baronsmead, a London-based insurance broker. About 93 percent of their directors were covered by directors’ and officers’ liability insurance.

Tiger, Harbinger

Tiger Asia, led by New York-based Bill Hwang, last month admitted to illegally using insider information to trade Chinese banking stocks and agreed to criminal and civil settlements of more than $60 million in a New Jersey court.

The U.S. Securities and Exchange Commission in June sued Harbinger’s founder Philip Falcone, alleging illicit conduct that included misappropriation of client assets, market manipulation and betraying clients. Falcone in late November asked a federal judge to dismiss the two SEC lawsuits.

The cost of coverage and potential impact on fund performances were top reasons for not buying insurance, followed by lack of demand from current investors, Citigroup said. About 60 percent of Asian hedge funds tracked by Singapore-based Eurekahedge Pte oversee $50 million or less.

Annual insurance premium amounted to 11.6 basis points, or 0.12 percent, of assets under management for managers with less than $50 million, according to the survey. The cost drops below 0.03 percent for larger managers.

The Monetary Authority of Singapore may require certain retail licensed fund managers to buy a minimum level of professional indemnity insurance based on the assets they oversee, according to the Citigroup survey. Minimum professional indemnity coverage has also been proposed as part of the European Union Alternative Fund Managers Directive initiative.

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