For professional investors, one of the major side-effects of the global financial crisis is the issue of counterparty risk.

As well as the lack of at the banks, most investors are now concerned that they could be exposed to the next corporate failure.

This fear has been particularly pronounced since investment bank Lehman Brothers went under in September.

Last week, a head of trading at a large UK fund manager told CoreData that it moved from monthly to weekly reviews of its trading counterparties last summer.

Other trading heads echoed this; the liquidity crisis has raised transaction costs and put pressure on their budgets, but their most important issue was assessing the creditworthiness of those with whom they entrusted their business.

As a consequence, the clock could be turned back in the financial markets.

Traders and investors might place a premium on quality, reputation and firms with a simple, robust business model, rather than seeking to trade purely on price.

Concerns over counterparties will only be heightened by the incredible news of a $50bn hedge fund fraud by Wall Street trader Bernard Madoff.

Some of the world’s largest banks and major hedge fund investors look like losing substantial amounts, with the culprit apparently confessing that he had been operating a massive Ponzi scheme, which was amazingly undetected by the regulators.

For investors, news of this sort is deeply worrying.

Many investors have sought to broaden their portfolios in recent times, away from volatile equities and in search of other sources of growth.

Hedge were an alternative they turned to, but not only have many hedge not been able to cope with recent market woes, but one of the largest and most reputable turns out to have been not all that it seemed.

Perhaps it is time for seemingly more sophisticated investors to remember a common advice mantra delivered to the more potentially gullible retail investor – if something looks too good to be true, it probably is.

Hedge clocking up positive returns regardless of overall market conditions could fall into this category.

Institutional investors have become increasingly interested in hedge in recent time; this scandal could act as a sudden dampener on that interest.

Credit, or liquidity in world’s financial system has been compared to oil in an engine, lubricating it and making it run more smoothly.

Without it, as we have seen, things don’t run so well.

A lack of trust and questions relating to the status of other market participants adds to the stuttering and misfiring in the market,

While a major fraud is a bit like a handful of sand and grit entering the engine – it should not be problem is everything is working well, but it might well be in a poorly performing engine.