The Bank of New York Mellon's Pershing Unit Releases New Study for Hedge Funds Focusing on Best Practices for Managing Counterpa
January 05 2009 - 8:00AM
PR Newswire (US)
JERSEY CITY, N.J., Jan. 5 /PRNewswire-FirstCall/ -- A new white
paper published by Pershing LLC, a subsidiary of The Bank of New
York Mellon Corporation, and Aite Group LLC has found that managing
counterparty risk is a much more critical component of a hedge
fund's overall business operations today than it has been in
previous years. The study, entitled Risk and Reward: Hedge Funds
Changing Views on Counterparty Relationships, focuses on the
heightened importance of effectively managing counterparty risk and
the integral role it plays in partnering with a prime broker. It
also highlights best practices that have been implemented by other
hedge funds to help address and mitigate counterparty risk. Key
findings from the study include: -- Hedge Funds Increase Scrutiny
On Managing Counterparty Risk -- Counterparty risk monitoring has
become a significant part of overall business operations. One of
the major drivers for heightened attention to managing counterparty
risk are hedge funds' concerns about the negative impact it could
ultimately have on their firms' operations should one of their key
counterparties default on their obligations. More than 50% of
respondents reported monitoring counterparty risk on a daily basis
and nearly 85% consider it an extremely important or very important
business issue. An overwhelming 96% of respondents also cited
managing counterparty risk as the number one factor in selecting
their prime broker relationships. Concerns about managing
counterparty risk two years ago were not a primary issue for most
hedge funds, as 26% of the respondents considered counterparty risk
important and 22% viewed it as moderately important; --
Counterparty Risk Management Must be Tackled Directly and
Systematically -- Effectively monitoring counterparty risk will
continue to be a critical component of a hedge fund's business
operations. The development of a standardized, well-documented
approach to analyzing counterparty risk remains one of the top
priorities for the hedge fund community. Best practices for
proactively managing counterparty risk include: -- Leveraging
innovative services from prime brokers, such as a tri-party account
approach -- Conducting consistent internal portfolio and risk
assessments -- Formalizing business processes by outsourcing and
installing in-house technology solutions such as portfolio
management systems -- Implementing third-party independent
valuation technology solutions and service providers supplemented
with in-house valuation tools; and -- Adoption of Technology --
There is no silver bullet for hedge funds when attempting to
actively monitor the balance sheets of important counterparties
despite the growing concerns over counterparty risk management.
Most hedge funds currently go through manual-intensive processes to
keep track of counterparty relationships. The reality is that
despite the industry's lack of a comprehensive technology platform
to fully automate counterparty risk management, hedge funds
continue to expand their presence globally and invest in more
complex instruments. Reliable counterparty relationships will
become even more critical, and continual innovation in terms of
technology and services from leading service providers will be key
to mitigating the hedge fund industry's exposure to counterparty
risk. Craig Messinger, managing director of Pershing Prime
Services, said, "Managing counterparty relationships is one of the
most important business and operational issues facing hedge funds
and the broader industry today. In order to help ensure continued
growth and success, hedge funds of all sizes must continue to
invest in and implement the proper internal controls and systematic
processes to effectively monitor, manage and mitigate counterparty
risk." Sang Lee, managing partner at Aite Group LLC, added, "The
current credit crisis has elevated the importance of counterparty
risk management in the eyes of many hedge fund managers. 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." Risk and Reward: Hedge Funds
Changing Views on Counterparty Relationships is a component of
Pershing's Ideas Without LimitsTM thought-leadership program. The
study is based on a survey conducted by Aite Group with 23 global
hedge funds during the summer of 2008. The top 100 hedge funds
--those with assets under management (AUM) greater than $500
million --represent more than 75% of total hedge fund AUM. Aite
Group targeted these funds to capture responses that reflect the
changing perception and importance of managing and assessing
counterparty risk. The respondents of the study were funds with
active trading operations that typically handled multiple asset
classes. The report was commissioned by Pershing LLC and
independently executed by Aite Group LLC. A copy of the study is
available by contacting Pershing Prime Services at or at
http://www.pershingprimeservices.com/. Pershing Prime Services
delivers an unconflicted, integrated suite of prime brokerage
solutions, including expansive access to securities lending,
dedicated client service, powerful technology and reporting tools,
robust cash management products, global execution and order
management capabilities and additional integrated solutions of The
Bank of New York Mellon. Pershing Prime Services is a service of
Pershing LLC. Pershing LLC (member FINRA/NYSE/SIPC) is a leading
global provider of financial business solutions to more than 1,150
institutional and retail financial organizations and independent
registered investment advisors who collectively represent over five
million active investors. Located in 19 offices worldwide, Pershing
is committed to delivering dependable operational support, robust
trading services, flexible technology, an expansive array of
investment solutions, practice management support and service
excellence. Pershing is a member of every major U.S. securities
exchange and its international affiliates are members of the
Deutsche Borse, the Irish Stock Exchange and the London Stock
Exchange. Pershing LLC is a subsidiary of The Bank of New York
Mellon Corporation. Additional information is available at
http://www.pershing.com/. The Bank of New York Mellon Corporation
is a global financial services company focused on helping clients
manage and service their financial assets, operating in 34
countries and serving more than 100 markets. The company is a
leading provider of financial services for institutions,
corporations and high-net-worth individuals, providing superior
asset management and wealth management, asset servicing, issuer
services, clearing services, and treasury services through a
worldwide client-focused team. It has $22.4 trillion in assets
under custody and administration, approximately $1.1 trillion in
assets under management, and services approximately $12 trillion in
outstanding debt. Additional information is available at
http://www.bnymellon.com/. DATASOURCE: The Bank of New York Mellon
Corporation CONTACT: Michael Geller, +1-201-413-4179, Web Site:
http://www.bnymellon.com/ http://www.pershingprimeservices.com/
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