As Bob Dylan once said, „The times, they are a changin'“ — which is perhaps the most accurate assessment of the hedge fund industry today. In the wake of huge scandals, one of the largest economic downturns in the past century, and a general distrust of the banking industry on the part of consumers, hedge fund managers face more risks today than ever before. And don’t think for a second that financial attorneys are unaware of all the potential missteps a hedge fund manager can take. It is perhaps not too much of an exaggeration to say that an entire mini-industry has sprung up in the legal profession looking for hedge fund managers to make a mistake, an error in judgement, or even simply fail to provide the returns a client expects. The previously dog-eat-dog world of hedge fund management liability might now more accurately be described as shark-eat-shark.

It’s not fair, but that’s the way it is. Clients are keeping eagle-eyes on their funds, helped by lawyers who have everything to gain from you making a single misstep, or even the appearance of a misstep. Add into the mix the new incredibly detailed standards of scrutiny from regulatory bodies, and it is virtually impossible for any hedge fund manager to escape from being sued. The question is no longer an „if,“ but a „when.“

First, you absolutely must double and triple-check your policy for exceptions and limitations. Though the underwriter may play down the built-in limitations, this could seriously leave you in the lurch if a situation comes up in which you are not covered. This is becoming an increasingly common practice especially in terms of exclusions when it comes to coverage of unjust enrichment and wrongful action suits. While you might have been able to get away with a limited coverage policy for such cases in the past, these specific kinds of suits are the new vogue for those suing financial managers. This is because new legal precedents are being set in such areas, many of which are very detrimental to hedge fund managers.

Additionally, some policies are written so that they only pay out upon final adjudication. Well, as anyone who has worked in the legal world knows, even the smallest trials can take literally years to go to court, putting a continual financial and personal strain on your company until by the time the case is over, it doesn’t matter if you actually won or lost, since you’ve spent so much money getting to the decision that you’re virtually done anyway.

In lieu of such uncertain financial times, and with so many new legal precedents being set for hedge fund management and liability, it is more important than ever to know what you’re up against. Old strategies of protecting yourself from hedge fund management liability claims are simply no longer feasible; it’s time to update your financial management strategies and your personal protection strategies to work in the new economy.

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