The new structured offshore captive vehicle will provide protection against fees lost resulting from a mass redemption or other business risks related to a run-on-the-fund.
A run-on-the-fund can cause hedge fund managers to lose assets along with attendant fees. StatSure Financial’s calculations show that a manager stands to lose $20 million in fee income for every $100 million in lost assets.
No commercial insurer offers redemption insurance, resulting in the majority of hedge fund managers self-insuring on a pay-as-you-go basis.
Joe Taussig, one of the founders of StatSure Financial, explained the lack of protection in place for hedge fund managers.
Taussig said: “Hedge fund investors are like a theatre goer sitting next to the exit, someone yells ‘fire’ and even if you’re 100 percent sure it is a false alarm, you better get out the door first or you’ll get trampled in the stampede.”
“If they think that other investors are going to head for the exits for whatever reason, it becomes a death spiral, the hedge fund manager has to liquidate positions on a fire sale basis which exacerbates bad performance and has more people bailing out.”
“It’s a classic captive situation where there's no commercial insurance available.”
Currently, managers have to self-insure risks on a pay-as-you-go basis.
StatSure Financial’s solution provides an alternative, allowing hedge fund managers to take advantage of regulatory accounting and tax structures unavailable to commercial companies and build up very big reserves.
The captive was incorporated last year, but the public launch took place this week at the Managed Funds Association conference, where the concept received a positive reception.