Successful investment funds rely heavily on the intellect and expertise of key individuals, the loss of which can prove ruinous to hedge funds of all sizes. In November 2014, one of Europe’s largest money managers, BlueBay, had to close a $1.4 billion fund because of the departure of a single key fund manager.
An unexpected loss of a key individual (key man) is a significant risk to investment fund investors. The risk is especially great for funds relying on a single investment manager. We recommend three primary strategies to mitigate key person risk: (i) include a key-man provision; (ii) purchase key-man insurance; and (iii) set up a dissolution procedure.
Investment fund terms typically include provisions that restrict the timing and amount of investor redemptions. These can include lockups, gates, notice provisions and the requirement that redemptions may only be made on specific dates (often quarterly).
A hedge fund key-man provision suspends withdrawal restrictions when a key individual or group of individuals leaves the fund, dies, becomes incapacitated, or is convicted of a serious crime. Some key-man provisions automatically trigger the termination of the fund. Key-man provisions can be triggered either by the loss of a single individual (more investor friendly) or group of individuals (more manager friendly).
Key man insurance refers to either a life insurance policy or disability insurance policy on a key individual within a company. Key-man insurance refers to an insurance policy taken out by a business to compensate the business for financial losses arising from the death or incapacity of a key executive. Purchasing key-man insurance can give investors comfort that funds will be available for the orderly dissolution or transition of the fund and can compensate investors for setbacks incurred from the loss of the key person’s services.
When a fund is run by a single manager, special care should be taken to provide for the orderly winding down of the fund. We recommend that clients set up a written contingency plan to identify who will take care of the logistics of winding down a fund. The contingency plan should include contact information for investors, service providers and banking professionals, as well as instructions for locating key information.