Hedging Along

December 21 – Financial Times (Saskia Scholtes):

“Hedge funds are scrutinising their levels of exposure to bank defaults, in a telling reversal of conventional risk management concerns. While bank exposure to the hedge funds they trade with has been in sharp focus since the 1998 collapse of Long Term Capital Management, a run of record-breaking losses and bailouts in banking has hedge funds re-examining how much they can be hurt by a bank collapse… In this environment, 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. ‘In the current era of falling credit ratings and banks announcing huge...writedowns, this kind of risk is a real and pressing concern.’”