Catch the Falling Knife in the Dark

Photograph by Jessica Ebelhar/The New York Times via Redux

In the wake of the LTCM episode, the large banks and securities firms that were counterparties to hedge funds strengthened their management of hedge fund risk significantly. Those improvements were motivated by their self-interest, which was reinforced by recommendations from their prudential supervisors and from the Counterparty Risk Management Policy Group (CRMPG), made up of 12 banks and securities firms that were among the most significant counterparties to hedge funds. However, recently there have been reports that competitive pressures have resulted in some weakening of risk-management practices.

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