IMF flags hedge funds as a growing systemic risk in global markets

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IMF flags hedge funds risk

Highlights

Hedge funds' gross assets surged from $4tn in 2013 to $13tn in 2026, with significant additional exposure via derivatives, according to the IMF.
Hedge funds' share of U.S. Treasury holdings more than doubled from 4 percent in 2022 to 9 percent in 2023 as central banks and asset managers retreated.
The IMF warns systemic risk rises as hedge fund leverage concentrates among five major banks and crowded trades amplify volatility and drawdowns during market stress.

IMF highlights expansion and market concentration

As reported by Financial Times, citing the IMF in its semi-annual Global Financial Stability Report, hedge funds' gross assets increase from $4tn in 2013 to $13tn in 2026, with total exposure even higher when derivatives are included.

The report says hedge funds are also becoming more important in government bond and equity markets. Their sovereign bond exposures have more than doubled since 2022, and their estimated share of U.S. Treasury holdings rises from 4 percent in 2022 to 9 percent last year, filling part of the gap as central banks and asset managers pull back from those markets.

The IMF argues the main vulnerability comes from the way those positions are financed. Hedge funds rely on leverage provided by prime brokers, usually the largest dealer banks, and that business is highly concentrated, with the five biggest banks serving about two-thirds of funds by assets under management.

Potential fallout for financial stability

While a diverse investor base can support market liquidity in normal conditions, the same highly leveraged strategies can amplify disruptions when volatility rises. The IMF also finds hedge fund portfolios are becoming increasingly similar, especially among the largest funds, raising the risk of simultaneous selling in crowded trades.

That risk is compounded by the nature of hedge fund capital, which can move quickly when performance weakens. During periods of market stress, the most crowded stocks see about 10 percentage points more volatility and drawdowns 4 percentage points larger than the least crowded stocks, according to the report.

The analysis suggests regulators no longer can treat hedge funds as a small and isolated corner of finance. In many jurisdictions, authorities have limited influence over their investment strategies and risk controls, while roughly 70 percent of investor capital is raised through offshore structures, making it harder to track where risks are building.

The broader implication is that hedge funds may not trigger the next crisis on their own, but their size, leverage and increasingly similar positioning mean they are likely to intensify any future shock.

Our earlier article on bullish options positioning in the iShares 20+ Year Treasury Bond ETF (TLT) noted a surge in call buying after a strong 10-year Treasury auction, signaling that some traders were starting to price in a potential bottom in the bond selloff. It also highlighted easing demand for downside hedges in rate-sensitive areas like utilities, reflecting expectations that yield pressure may be starting to fade.

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