Addressing counterparty risk: Hedge funds and the need for rigorous due diligence

Abstract

This paper examines the counterparty risks currently being faced by hedge funds and suggests specific actions that can be taken to mitigate such risks. It presents findings from an independent study: Risk and Reward: Hedge Funds Changing Views on Counterparty Relationships, published by Pershing LLC, a subsidiary of BNY Mellon. The paper examines counterparty risk from the hedge fund manager's perspective and its implications for sound business management. The findings in this study are based on a survey of 23 global hedge funds conducted by the Aite Group, an independent research and advisory firm, in the summer of 2008. Drawing on the experiences and insights of leading hedge fund managers in the current volatile economic environment, this study provides a framework to consider when addressing and mitigating counterparty risk.