The European Securities and Markets Authority (ESMA) has published its latest risk assessment, shining a light on the growing concerns surrounding leveraged alternative investment funds (AIFs) and certain UCITS funds using the absolute Value-at-Risk (VaR) method.
While most EU funds maintain low levels of leverage, ESMA identified a group of AIFs and UCITS funds with far greater risk exposure. Particularly, some UCITS using the absolute VaR approach show very high gross leverage, raising supervisory red flags.
Hedge funds were found to have the highest leverage levels among AIFs, despite their smaller footprint in the EU fund industry. Real estate funds have also faced headwinds in some regions due to falling property prices and investor withdrawals, though overall resilience remains. In the case of GBP Liability-Driven Investment (LDI) funds, measures to limit interest rate risk have helped lower leverage and strengthen the sector’s stability.
New analysis into UCITS funds using the absolute VaR approach revealed that around 8% of the UCITS market falls into this category. A subset of these funds mirrors hedge fund-like risks, with high gross leverage, complex derivatives exposure, and heightened market sensitivity. Although they make up only 2% of the UCITS segment, these funds manage more assets than EU hedge funds combined.
The fragmented structure and range of strategies in the VaR UCITS segment underline the need for tighter oversight. ESMA stressed the importance of active supervision to ensure that evolving risks are properly addressed across this dynamic part of the market.
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