07/01/2009

New study finds increased importance of counterparty risk assessment

The management of counterparty risk is a more critical component of a hedge fund’s overall business operations today than it has been in previous years, according to a new white paper published by Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation, and Aite Group LLC.

Among the findings of the study, entitled Risk and Reward: Hedge Funds Changing Views on Counterparty Relationships, an overwhelming 96% of respondents cited managing counterparty risk as the number one factor in selecting their prime broker relationships.

Two years ago a mere 26% of respondents considered counterparty risk important and 22% viewed it as moderately important, according to the study.

Today, more than 50% of respondents reported monitoring counterparty risk on a daily basis.

The study cited the adoption of technology as a as a critical factor to mitigating the hedge fund industry’s future exposure to counterparty risk.

The study, based on a survey conducted by Aite Group with 23 global hedge funds, was conducted during the summer of 2008. The respondents of the study were funds with active trading operations that typically handled multiple asset classes.