Risk management in HF is less about predicting what might go down than avoiding trading when liquidity dries up. This is why when markets get weird HF algos pull out: an unexpected one-minute trading stall can wipe out a quarter's profits.
In crypto, where the market is still learning lessons from the 1930s, the nickels are quarters but the bulldozers are tanks.
Counterparty risk definitely still exists, but it is getting better very quickly with the growth of regulated US-based exchanges like gdax, gemini, and ledger x. In the altcoin world, Bittrex is in the process of fulfilling state-by-state requirements for regulatory approval. The crypto world is very different today from when MtGox dominated and getting even better.
If counterparty risk is a top concern (and it probably should be) then don't trade on unlicensed exchanges... That rule is great to follow and I haven't even gotten into any usdt tether issues...
However, the ones I have looked at / tested so far just aren't ready for primetime. Slow transaction times, lackluster user experience, no liquidity.
But those are all problems that are to be expected for what are basically beta-status projects (at best) and I am excited to see where things go from here.
Problem was, if you thought you were selling BTC -> USD you were wrong, you were selling for GOX-USD which were known to be worth much less than USD. In fact, they turned out to be worthless.
When a given coin trades at different prices on two exchanges (which is what these arbitrage algorithms look for), it will try to buy that currency on the cheap one and sell on the expensive one.
The main reason coins have different prices (more than a few cents) on different exchanges is that people are worried about the exchange being insolvent.
For instance, during MtGox's slide into doom, Bitcoin was cheap there. So this algorithm would have been busily buying Bitcoin with USD on MtGox, then transferring the Bitcoin to another exchange to sell, so it could pump the USD back into MtGox. Since withdrawals from MtGox were throttled, you would have built up a large balance there. When they shut down, you would have lost bigly.
People do make money doing arbitrage between exchanges, but you need a sophisticated model that considers counterparty risk, which isn't something you can read from a price sheet.