Post-Crisis: Hedge Funds, Custodial Risk and Prime Brokers
Prior to the most recent financial crisis, money managers had an awareness of counterparty and custodial risk in concept, but it wasn’t a priority. We were coming off a 25-year bull-run in the financial markets during which the industry did not experience the failure of a single significant custodial bank.
The financial crisis and the associated global securities firm failures caused a dramatic shift in the way managers select and work with their prime brokers. Custodial risk quickly rose to the forefront as an issue for hedge fund investors. It naturally follows that hedge fund managers would respond, and today multi-prime and multi-custodian relationships are considered best practice in the industry.