Assessing Counterparty Risk in Derivative Hedging Strategies

In the context of alternative investments, risk management is a critical component to safeguard capital and enhance returns. A hedge fund manager is evaluating a new investment strategy that involves using derivatives to hedge against market downturns. However, the manager is concerned about the inherent risks associated with derivatives, particularly how they can amplify losses in volatile markets.

Which of the following risks is MOST associated with using derivatives in hedging strategies for alternative investments?