In what seems to be a reversal of conventional risk management concerns, hedge funds are scrutinising their levels of exposure to defaults by banks. Ever since the 1998 collapse of Long Term Capital Management, it was the banks who kept a close watch on their exposure to the hedge fund counterparties. However, the recent record-breaking losses and bailouts of banks appear to have bought a role reversal with hedge funds inspecting how much they could suffer from a bank collapse.

Bear Stearns has reported losses 4 times analysts' expectations and a USD 1.9bn writedown on subprime losses, while Morgan Stanley became the third big investment bank in a month to raise capital from a sovereign wealth fund after it announced subprime related writedowns of USD 9.4bn. With this background, some hedge funds have found they are more exposed to the risk of bank failure because they agreed to trading terms that did not require banks to post collateral against certain derivatives trades, said Lauren Tiegland-Hunt, managing partner at law firm Tiegland-Hunt. "When the credit crunch took hold, many firms were surprised to discover they had entered 'one-way' collateral agreements that not only left money on the table, but also left them exposed to increased counter-party credit risk," she said.

 

 

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