70% of hedge fund managers have changed their operations in order to reduce counterparty risk, according to a survey by Greenwich Associates, and 60% of hedge fund managers have increased the number of prime brokers. One-third of respondents have also reached out to obtain more independent valuation and accounting.
The study, commissioned by Omgeo and conducted by Greenwich Associates, examined the operational practices of over 50 hedge funds each with assets over $1 Billion (USD) in North America, Europe and Asia.
The move towards increasing prime broking relationships complements the findings of the 2009 Global Custodian Prime Brokerage Survey, where one hedge fund in three experienced the termination of a relationship with a prime broker during the year. This rose to more than one in two among the largest hedge funds. Launching new relationships in order to decrease counterparty risk has become a driving factor in the hedge fund industry.
Unsurprisingly, the Greenwich survey discovered more than two-thirds of the hedge funds participating in the survey believe operational improvements and automation have a direct and positive impact on their ability to attract investors and assets. Better routines and work practices have helped us provide transparency to our clients, which gives investors additional confidence in us, said one North American manager.
The events of the past year have illustrated the direct link between operational improvements and hedge funds ability to attract and retain assets from investors, explains Greenwich Associates consultant Andrew McCollum. Theres a real change of behaviour going on, the days in which investors would entrust their money to the black box of a skilled hedge fund manager are over. In the post-crisis marketplace, investors are demanding not only transparency, but also sophisticated operational processes and infrastructures capable of managing the types of risks theyve experienced over the past 18 months.
This study highlights something weve been hearing for some time from our own hedge fund clients: today it is absolutely critical for hedge funds to understand their counterparty risk exposure, as this knowledge is imperative to a funds ability to attract capital, said Matthew Nelson, director of market intelligence, Omgeo. It is encouraging to see so many hedge fund managers in this day and age recognizing how closely operations and counterparty risk are aligned and that such measures are being taken to improve automation in the post-trade world.
The full survey can be found here.