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Alternative Market Briefing

Commonfund white paper argues investors must address counterparty risk management

Wednesday, November 14, 2012

Beverly Chandler, Opalesque London: "Managing Counterparty Risk", a new white paper by David Belmont, Chief Risk Officer, Commonfund Group, argues that investors must address counterparty risk alongside their investment strategy and shows how investors can limit counterparty risk while executing their investments.

Analyzing MF Global, Peregrine Capital, and other counterparty failures, the paper argues that the financial system is no safer today than before the Credit Crisis and investors continue to incur counterparty losses with alarming frequency. The paper recommends that investors define their counterparty risk strategy at the same as they execute their investment strategy, and presents in-depth practical steps investors can take in order to minimize losses.

Belmont reports that findings show that while investors must accept a degree of counterparty risk in the investment process, they can minimize their exposures by frequently netting collateral, using market-driven indicators of counterparty quality, aggressively negotiating their agreements in detail, monitoring their exposures daily, diversifying counterparties, and structuring their investments as managed accounts. Alternatively, they can outsource their counterparty risk management by employing investment managers that have a strong counterparty risk management capability.

"Counterparty risk is a fact of life, and it is unpredicta......................

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