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Hedge Funds have trouble planning for the future

On the whole, Senior Partners at established hedge fund firms have not done sufficient succession planning to ensure that their firms will operate as desired after a change in ownership according to "At Risk: Managing for the Future," a new survey conducted by CPA firm Rothstein Kass. In particular, very few hedge fund Senior Partners have planned for the death, disability or departure of another owner and the associated consequences for the firm and its operations.

"At Risk: Managing for the Future," Rothstein Kass' in-depth look at hedge fund firms and succession planning, was co-authored by Russ Alan Prince, a leading authority and counselor on private wealth, and Hannah Shaw Grove, a widely recognized expert on behaviors and finances of high-net-worth individuals. The survey was based on telephone interviews with 349 hedge fund Senior Partners at US-based hedge fund organizations. Participating firms were segmented by assets under management, with almost 60 percent of the firms having total assets under management between $100 million and $750 million, with the balance exceeding $750 million. All of the companies represented had been operating for at least five years and had multiple owners.

"In analyzing our findings we were somewhat surprised to learn that partners are largely unprepared to handle ownership changes resulting from death, disability or termination. For example, fewer than 30 percent of partners are prepared to deal with the death of a managing partner. What was far more astounding, however, was the number of partners - nearly half - that did not know how to assess their level of readiness," said Rick Flynn, a Principal at Rothstein Kass' Family Office Group. "This is likely in part because these are difficult issues to deal with from an emotional standpoint. However, given the profound negative consequences that any uncertainty can have on an enterprise, it's apparent that the industry has underestimated the importance of thorough contingency planning."

According to the research, only slightly more than half of the respondents know what person or entity will obtain voting rights of their company in the event of an owner's death. This is cause for concern since after such an event, operational and leadership issues are likely to arise at firms where voting rights policies are not clearly defined.

The survey posed four hypothetical scenarios to survey participants - the death, disability, voluntary termination and involuntary termination of an owner - to gauge their level of preparedness in each situation. Respondents were then asked about the steps they have taken to prepare for the succession of a business owner or events that can impact the current structure of the company. Among notable survey findings:

• Almost 70 percent of survey respondents suggested that they are not prepared to handle issues arising from extended absence of a partner due to disability.
• Survey results revealed that a minority of respondents feel equipped to address departures resulting from voluntary (37 percent) or involuntary (35 percent) terminations of an owner.
• An overwhelming majority (75 percent) of those polled said they do not have a formal succession plan for ownership and control in the event of an ownership change. Of those respondents with a plan in place, more than half have not updated this plan in three years or more.

"Most of the uncertainty surrounding ownership changes results from the lack of a sufficient succession plan. Of those polled, less than one-quarter indicated that they have a formal succession plan in place. Among these firms, almost 90 percent believe that they have adequately communicated the elements of their plan to key employees," said Mr. Flynn. "However, our research suggests that these firms are overrating their level of preparedness, as nearly 60 percent have not reviewed the plan in three years or more. Due to changes to the management structure, documents can become quickly outdated and should be reviewed on an annual basis to avoid disruptions to the firm in the event of unanticipated ownership changes."

About the Authors:

Russ Alan Prince is the world's leading authority on private wealth, the author of 40 books on the topic, and a highly-sought counselor to families with significant global resources, and their advisors. He is co-author of Fortune's Fortress: A Primer on Wealth Preservation for Hedge Fund Professionals.

Hannah Shaw Grove is a widely recognized author, columnist, speaker and an expert on the mindset, behaviors, concerns, preferences and finances of high-net-worth individuals.She is co-author of Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy.

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