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.
