ESMA Urges Enhanced Oversight of High-Leverage Funds Across Europe
The European Securities and Markets Authority (ESMA) has recently released a comprehensive risk assessment report that highlights significant concerns regarding leveraged alternative investment funds (AIFs) and specific UCITS funds employing the absolute Value-at-Risk (VaR) method. This analysis is crucial for investors and regulators alike, as it reveals the evolving risks within the investment landscape.
Key Findings from ESMA’s Risk Assessment
Although the majority of EU funds maintain relatively low leverage levels, ESMA has identified a subset of AIFs and UCITS funds exhibiting considerably higher risk exposure. This section outlines the main findings:
- High Leverage Levels: Certain UCITS utilizing the absolute VaR approach have demonstrated exceptionally high gross leverage, which has raised concerns among supervisory bodies.
- Hedge Funds Lead in Leverage: Hedge funds were noted to possess the highest leverage ratios among AIFs, despite their limited presence in the EU fund industry.
- Real Estate Fund Challenges: Real estate funds are experiencing difficulties in specific regions due to declining property values and investor withdrawals, though they continue to show resilience overall.
- GBP LDI Funds Stability: Measures implemented to mitigate interest rate risk in GBP Liability-Driven Investment (LDI) funds have contributed to a reduction in leverage, enhancing the sector’s stability.
Insights into UCITS Funds and Absolute VaR
Recent analysis has indicated that approximately 8% of the UCITS market falls under the category of those utilizing the absolute VaR approach. Notably, a segment of these funds mirrors the risks typically associated with hedge funds, characterized by:
- High gross leverage
- Complex derivatives exposure
- Increased sensitivity to market fluctuations
Even though these funds represent only 2% of the UCITS sector, they manage more assets than all EU hedge funds combined, underscoring their significance.
Need for Enhanced Oversight
The diverse structure and range of strategies within the VaR UCITS segment highlight the urgent need for tighter regulatory oversight. ESMA has emphasized the necessity of proactive supervision to ensure that emerging risks are effectively managed in this dynamic part of the market.
For additional insights and a deeper understanding of ESMA’s findings, visit RegTech Analyst.
