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. In addition, the broker-dealers that failed (e.g. for example, Drexel) were handled in such a way that custodial risk remained a non-issue. So, while the awareness was there, the reality of custodial risk was not entirely appreciated by the majority of hedge funds and their investors.