ESMA steps up its monitoring of EU alternative investment funds and sees potential risks in funds exposed to leverage and liquidity mismatches

Here is the gist of the document, summarizing the key points:

Summary:

The European Securities and Markets Authority (ESMA) has published a report on the EU alternative investment funds (AIFs) market, highlighting risks posed by leveraged AIFs, particularly real estate (RE) funds. The report confirms the risks of RE funds due to declining transactions and falling prices, as well as existing liquidity mismatches exacerbated by open-ended RE funds offering daily liquidity. The size of the AIF sector decreased slightly to EUR 6.8tn in 2022, driven by valuation losses in bond and equity funds. ESMA also notes risks in hedge funds' leverage, Liability-Driven Investment (LDI) funds, and will continue to work with national competent authorities to address these risks and meet ESMA's financial stability objective.