A joint Directors and Officers as well as Errors and Omissions policy outline for hedge funds. The D.&.O. policy applies at the partnership level, while the E.&.O. piece covers portfolio managers and analysts. Please refere to the article penned by Mr Andrew Ross Sorkin in the 'New York Times'. https://www.nytimes.com/2021/03/29/business/dealbook/credit-suisse-nomura-archegos.html

1. REVIEW OF PRODUCT CONCEPT
In researching hedge funds (Funds) and existing errors and omissions (E&O) and directors and
officers (D&O) products, I spoke at length with a successful practitioner with whom I went to high
school. Notwithstanding my inexperience, some thoughts did occur to me that influenced my
thinking about developing new D&O and E&O policies (Policies):
 How to distinguish between a loss event covered by the policies and losses incurred by a
Fund? Darwin would indemnify the former. But the Fund Manager / General Partner (Manager)
would properly absorb investment losses since Managers assume investment risks. In doing so,
they incur occasional losses as a cost of doing business.
 What type of hedge fund (Fund) will be covered under the Polices? Traditional long / short
Funds now account for only 20-25% of operating Funds. The rest are relative value, real estate,
mezz debt, illiquid equities, structured debt, emerging market, m.&a. arbitrage and on and on.
 Who will be insured? The Manager? Specific Funds sponsored by the Manager? The Limited
Partners (as additional insureds)? Any two or all three?
 How mature will the market be when Darwin’s products enter it? Currently, something like
30% of Funds have policies. Would Darwin learn any lessons from Chubb, A.I.G. et al.?
This product line could be quite cost intensive. The distinction between insured and investment
losses may be a matter of perspective. Darwin may turn down a claim by a Fund for very good
reasons but still expend time and resources in expensive litigation. Evidence is mounting that, as
hedge fund failures accumulate, affected parties are seeking indemnities for investment. People are
looking for deep pockets on whom to off-load losses. Darwin would be an obvious target.
1. Limited Partners would likely sue the Manager and name Darwin in that suit.
2. Currently, a Manager is suing its third-party administrator for causing its Fund’s collapse. If that
Manager has an E&O policy, the administrator’s insurer will probably subrogate against the
Manager’s insurer.
3. An affiliate of one of the largest Fund Managers in the world has been implicated in hiding losses
of an unaffiliated slackly regulated off-shore Fund. Regulators (as receivers) or Bankruptcy
Courts may claim under Polices in place both for the offending Fund seeking to hide its losses
and the large Fund’s affiliate actually hiding the losses.
These are just three scenarios evident to an outsider like me. There are many others, I am sure.
Thus loss prevention may determine the Policies’ profitability. There are four common reasons for
the collapse of a Fund:
 fraud – pyramid schemes, fabricated values or ‘walking up the stock’ (a small trade on an illiquid
stock rising the value of the holding) to create an appearance of high returns;
 leverage - either explicit (e.g., layers of exposure through structured finance, short-sales, margin
trades, repo-trades or longer-term borrowing) or off-balance sheet (primarily derivatives);
 hard-to-value assets – illiquid securities liable to price-inflation through trades of a small portion
of the holdings or non-traded securities with values calculated by pricing models; and,
 changing strategies – taking higher risk positions outside the Manager’s expertise to bet
‘double-or-nothing’ in an effort to avoid announcing losses likely to precipitate redemptions.
STRATEGY
The appended term sheet gives a 40,000 foot perspective of addressing the possible underwriting
issues in underwriting Policies to Funds. The basic parameters would be to use exclusions to
protect Darwin from common loss scenarios; using attachment points to make managers financially
accountable for their actions; and underwriting criteria embodying best practices. The strategy that I
would propose would be simple.
 Spend time in Grand Cayman Island and find out how cloistered the outside accountants,
attorneys, regulators, etc. are to see in outside valuation experts or Trustees are really
independent. Nevertheless, underwrite from Connecticut to preserve professional detachment.

2.  If the moral hazard investigated by spending time in the sun proved to be moderate, then depart
from current industry practices by underwriting D&O only for Managers and E&O for specific
Funds of insured Managers.
 If possible, limit initial Polices to SEC / FSA registered Funds (15-20% of the Funds but
declining) or globally reputable Managers to learn the lessons of the trade to be applied to the
great majority of less transparent non-registered funds.
 Once the lessons learned are identified and applied, then pursue the mid-level Funds ($100-
250 million) with known track records, adequate risk management / asset valuation practices and
squeaky-clean management backed by a verifiable pedigree. (These Funds tend to generate
higher returns, disposing them toward paying up for a Policy to profit Darwin handsomely).
UNDERWRITING CONSIDERATIONS
The following factors are an incomplete set of considerations in underwriting Policies for Funds and
Managers since they are proposed by an outsider (i.e., me). There would be two basic classes of
risk: moral hazards and operating risks. I would think moral hazards would take precedence with
Managers since Fund accounting is often malleable and ripe for manipulation.
 Moral Hazard:
1. the “grease-ball” factor and the professional pedigrees of key managers;
2. outside asset valuation, pricing verification, back-testing of modeled results and portfolio
accounting by third parties drawn from a previously known Darwin-approved list;
3. best practices in governance (i.e., written risk management guidelines, asset valuation
policies, accounting / internal controls and due diligence standards approved by outside
members of the Board of Directors / Advisors); and,
4. transparency of governance and accounting with limited partners.
 Operating Risks:
1. hard-to-value assets as a percentage of the portfolio…
 assets with prices derived from computer-based pricing models limited to 5%;
 illiquid securities (based on trading volume) limited to 5%;
 small-cap stocks limited to 10%; and,
 total hard-to-value assets limited to 10%.
2. leverage as a percentage of the net asset value of total funds invested by limited partners…
 structured finance securities (e.g., C.D.O.s or asset-backed securities) limited to 25%;
 other on-balance sheet leverage (i.e., margins, repos, etc.) limited to 100%;
 total on balance sheet leverage limited to 100%;
 off-balance sheet leverage (primarily derivatives) limited to 50%; and,
 total leverage limited to 125%.
3. investment / investor characteristics as a percentage of the portfolio or in dollars…
 concentration limits, where appropriate, for industries, securities or asset classes;
 average limited partner investment (excluding top three) of $5 million or more; and,
 a minimum percentage of institutional investors by portfolio share and by number.
4. other risk mitigants…
 entry & exit policies (e.g., minimum of six months’ notice for L.P. to withdraw);
 portfolio companies actively managed by Manager limited to 25% of portfolio; and,
 limitations on affiliated transactions (to prevent conveyance of bad assets from an
uninsured Fund into an insured Fund).

3. UNDERWRITING TERMS-in-BRIEF
Insurer Darwin Select Insurance Company (A- Bests) or a designated affiliate or third-
party underwriter
Policies
Underwritten
Directors and Officers (D&O) Liability for Managers and General Partners of
hedge funds employing strategies including but not limited to:
 distressed / below investment grade bonds;
 commodities, precious metals, real estate;
 derivatives and structured finance;
 foreign currency spot and forward contracts;
 merger & acquisition arbitrage;
 statistical / currency arbitrage and relative value;
 global securities and emerging markets; and,
 other, including multi-strategy.
Errors and Omissions (E&O) Liability for specific hedge funds of Managers
already insured under a D&O policy issued by Darwin et al.
Target Insureds Managers / General Partners of hedge funds (Funds) and specific Funds:
 registered with the U.S. Securities & Exchange Commission;
 overseen by the U.K. Financial Services Authority;
 Managers with at least $500 million of total assets under management
in all funds; and,
 unregistered hedge funds with an average monthly net asset value
(N.A.V.) of at least $100 million for the previous year.
Insured Risks Wrongful acts by Fund Manager and the portfolio managers of insured Funds
on a claims-made basis
D&O Policy Limit The lower of $10 million or 10% of the average daily N.A.V. for the preceding
month of hedge funds covered by E&O policies
D&O Deductible $100,000
E&O Policy Limit Up to 25% of the average N.A.V. for the preceding month
E&O Attachment
The higher of 5% of the average N.A.V. for the preceding three months or the
total investments of the Manager into the fund
Policy Term One year; effective ninety days after issuance of insurance binder with
coverages retroactive for incipient loss events occurring in first ninety days
Exclusions Customary for D&O and E&O policies, including gross negligence and willful
fraud, supplemented by additional exclusions to include but not be limited to:
 willful fraud and gross negligence;
 portfolio turnover of more than 50% in preceding three months;
 change in asset classes of more than 25% in previous three months;
 loss events originating from conditions emerging prior to policy period;
 cross-sale / conveyance in the previous month of invested assets from
affiliated uninsured Fund of more than 5% of portfolio of insured Fund;
 cross-sale of investments of more than 10% in previous three months;
 increase of total leverage by the higher of 25% of outstanding leverage
or average daily N.A.V. of the preceding month;
 increase in leverage of 50% or more during past year; and,
 violation of concentration limits.
NOTE: Supplementary exclusions can be waived by Insurer with its prior
notifications and consent, such consent not to be unreasonably withheld. (This
exclusion and the requirement for its waiver force the Manager to come
to Darwin to explain shifts in strategy and other changes often
undertaken by prudent hedge funds and their Managers.)