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The recent decision by hedge fund luminary George Soros to effectively depart the industry and administer his funds through a family office was no surprise – his funds had been closed for 11 years to outside investors, who owned just a fraction of the $25bn total. However, while his exit from the sector was a logical choice, other funds considering how they can remain in the hedge fund game face tougher questions. Succession planning is difficult when the confidence of your investors is closely tied to the performance of a certain trader or the reputation of a founder.

So what steps can hedge funds take to reassure investors that their prospects don't just depend on the fortunes of certain key players? Elliott Management Corp, the $17bn US hedge fund, took the unprecedented step recently of creating a formal succession plan that would install a four-person management committee in the event of founder Paul Singer's departure. It was a rare move designed to indicate long-term stability, with the committee having the power to oversee the transition and select a CEO.
Myron Kaplan, founding partner at Kleinberg, Kaplan, Wolff & Cohen, is an advisor to Elliott Management and an intended member of the firm's planned committee.

"Investors want to know if they have invested in a money management organisation with stability or just put their chips down on one guy," he says. "With the institutionalisation of the industry and increased due diligence demands, everyone is asking about succession planning." He believes the structure Elliott has put in place sends a signal that the business is about more than its founder. But what if a fund's returns are reliant on an individual's performance, a ‘star trader' for instance?

Can you convince investors that returns will continue when that person has gone? "That's the $64,000 question," continues Kaplan. "The capital in a hedge fund is not permanent and performance is crucial. But if a management company has developed an institutional process and has a talented and diverse investment team which it exposes to investors over time, that can be effective."

Jeffrey Bronheim, Cheyne Capital Management's general counsel, agrees on the importance of convincing investors that talent, together with responsibility for performance, runs through the trading team. "If a firm is looking to institutionalise, you want to think about more traders across all funds as well as a diversified set of funds," he says. "Investors want strategies with more than one manager, and multiple strategies." Key-man provisions, which allow investors and counter parties to pull out should certain individuals leave, deepen the headaches for hedge funds.
What is more, some think that plans such as Elliott's – designed to show that a hedge fund has long-term stability – depend on investors being convinced that continued performance will be assured.