August 29, 2012
In 2008, the S&P 500 dropped 41% and the Dow 36%. Market losses and Madoff’s schemes reverberated throughout the hedge fund industry, which experienced a net outflow of investor capital. The Wall Street Journal called 2008 the worst year for hedge funds since 1990.While things are better today, serious liability risks remain given the current regulatory environment, volatile market conditions, and the public concern regarding corporate governance. Risks include claims for misrepresentation, breach of a fiduciary duty, oversight failures, negligence, and even outright fraud.Hedge funds should carry both Director’s and Officer’s Liability Insurance (D&O) and Errors and Omissions Insurance (E&O). The former protects directors and officers from liability, while the latter protects the fund and its managers from professional errors.In this article, the authors spotlight three of the most pressing concerns for hedge funds when seeking liability coverage.This article also appeared in Advisen (October 1, 2012).