Hedge funds are poorly prepared for changes in the composition of senior management, posing a threat to their organisational stability and revenue-generating ability. Even among larger funds that have developed contingencies, 60% indicate that these plans have not been updated in three years or longer. The findings are based on a new poll of 349 hedge fund partners by alternative investment advisors Rothstein Kass.

Only 30% of partners surveyed were prepared to deal with the possible death of a partner, while 22% said they were not ready and 50% were uncertain. Even fewer principals said they were prepared to manage an extended absence of a partner due to disability. Only one in 10 partners had planned for such an event while nearly 70% admitted they were not prepared. There was not a meaningful difference in how prepared the partners were when segmented by the company’s assets under management, according to the poll.

No contingency

More firms were ready to address the departure of an owner. Nearly 40% said they were adequately prepared while an almost identical percentage said indicated that they were not. The survey also asked hedge fund partners about the steps they have taken to prepare for the succession of a business owner. Just one-quarter said they have a formal succession plan in place when a change occurs.

“Firms must realise that that contingency documents can quickly become outdated and, therefore, must be re-evaluated and amended on an annual basis,” says Alan Kufeld, tax principal at Rothstein Kass. “Because of this, there may still be concern, even among the 25% of respondents who do have a formal succession plan in place.”

Slightly more than 33% have a buy/sell agreement, in addition to the provision of the management company’s operating agreement, to specify the transfer of controlling shares when one partner withdraws from the hedge fund. “Curiously, an even larger percentage of partners did not know if such an agreement exists,” concludes the report. Hedge funds with more than $750m in assets are more likely to have a buy/sell agreement than their counterparts at smaller firms. All of the hedge funds represented had been operating for at least five years with 60% of the firms managing between $100m and $750m in assets. The balance managed more than $750m in assets.