Funds Hub

Should hedge funds worry about porous Chinese walls?

Nowadays most hedge fund managers who use leveraged trading strategies such as relative value to exploit pricing inefficiencies employ multiple prime brokers.

If you ask them why, they will generally answer that, post Lehman, having multiple prime brokers is seen as a fundamental part of managing counterparty risk.

However, many hedge funds, especially the high-frequency traders who have come under the spotlight recently, already used multiple prime brokers before the collapse of Lehman.

But two years ago, hardly any of them mentioned counter-party risk. It was almost a non-issue, since virtually no one was expecting a major bank to go down the tubes.