Counterparty risk concerns escalate for hedge funds

Managing counterparty risk has risen to become a critical business issue for hedge funds and the key factor in deciding prime broker relationships, according to a study published by research consultancy Aite Group and Pershing, a subsidiary of The Bank of New York Mellon.

The white paper, ‘Risk and Reward: Hedge Funds’ Changing Views on Counterparty Relationships’, found that nearly 85% of respondents cited the monitoring of counterparty risk as an extremely or very important business issue, compared with 26% who described it as important or moderately important two years ago.

Of the 23 global hedge funds surveyed by Aite Group, 22 cited counterparty risk management as the number one factor in choosing a prime broker. More than half said they monitored counterparty risk on a daily basis.

Sang Lee at Aite Group said, “Creating a more systematic approach to counterparty risk management will go a long way in restoring market confidence and helping the hedge fund industry recapture its profitability.”

The study also highlights best practices available to hedge funds when tackling counterparty risk, including consistent internal portfolio and risk assessments, use of prime broker services such tri-party account methods, as well as in-house and third-party valuation technology and services.

Pershing is a financial business solutions provider that includes Pershing Prime Services, which offers prime brokerage solutions such as securities lending access, order and execution capabilities and cash management products.