May 22, 2020 / 6:02 AM / 12 days ago

Full disclosure? Hedge funds navigate COVID health questions

LONDON (Reuters) - As the hedge funds once clustered in London’s Mayfair negotiate gyrating markets, they are facing a new line of investor questioning: who has contracted COVID-19?

FILE PHOTO: St Pauls cathedral and the City of London financial district are seen at dawn as the spread of coronavirus disease (COVID-19) continues in London, Britain, April 19 2020. REUTERS/John Sibley/File Photo

With billions sometimes riding on the performance of one star manager, or a small constellation of talent, investor interest in delving into the medical status of staff — a realm considered by many private — is perhaps understandable during a pandemic.

“The important thing for managers is planning – what do they intend to do on the basis of when, not if, they get the virus,” said one of three investors who told Reuters they wanted to be informed about any coronavirus infections at the hedge funds they invest with.

But most of Britain’s hedge fund managers have no protocol for divulging such details and there are no specific legal requirements for them to do so, according to Samuel Brooks, a partner at law firm Macfarlanes.

As many infected by the novel coronavirus appear to show only mild symptoms, some hedge funds – normally based in the well-heeled west London enclave but now scattered and working from home – are taking a ‘need to know’ approach to staff health disclosures.

They say they would only tell investors if their top managers fell seriously ill, but not necessarily inform them of a mild infection, or if lower-ranking staff became sick, according to interviews.

“You have a duty to your investors to advise them should any of your key employees or senior management fall ill with anything that incapacitates them beyond a reasonable period of time,” said Kristofer Tremaine, founder and CIO at trade finance hedge fund Kimura Capital.

“Admission to hospital with COVID-19 would fall into that category.”

James Sivyer, an analyst at hedge fund data and analysis firm HFM, said the consensus view among 25 hedge funds was that the disease was now so widespread that a mild case would almost be a non-event — and none he had spoken with had notified or planned to notify end investors about such infections.

Regulated British finance firms are obliged to report any material issues impacting their businesses and have to pay “due regard” to the interests of their customers under Financial Conduct Authority rules.

Where funds can be managed by a variety of people, and are advertised as such, their obligation to notify investors about staff absences depends in part on their prospectus, succession plans and any individual agreements with investors, regulatory experts say.

“We sometimes see investment managers being required to provide this type of information because of how they have described the portfolio being run in their prospectus,” said Devarshi Saksena, partner at law firm Simmons & Simmons.

The risks of having so many assets tied to the performance of one person or a small group of people — known as ‘key person risk’ — has long been an issue in the hedge fund industry, where a star manager can attract billions from investors.

Big, influential and early investors may manage such risks with additional agreements called side letters, that can allow for greater transparency, although some regulators have raised concerns about their use.

Nevertheless, some hedge funds are adamant that things would need to get critical before they divulge staff medical details. One portfolio manager, who declined to be named, said he would have to be at death’s door before investors were informed.

“If I were going to die from it then, yes, we would tell our investors,” he said.

Reporting by Maiya Keidan and Kirstin Ridley. Editing by Carmel Crimmins

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