The European Securities and Markets Authority (ESMA) has published its latest statistical report on EU alternative investment funds (AIFs), as measured by net asset value (NAV), which in 2018 amounted to €5.8trn or nearly 40% of the total EU fund industry. The report is based on data from 30,357 AIFs, or almost 100% of the market.
Sector breakdown
Funds of funds (FoF) accounted for 14% of the industry, followed by real estate funds (12%), hedge funds (6%) and private equity funds (6%). Other AIFs accounted for almost two-thirds of the sector (61%), covering a range of strategies, with fixed income and equity accounting for 67%.
Most AIFs are sold to professional investors (84%) but retail participation is significant at 16%, with the highest share in the FoF and real estate categories.
Liquidity risk an issue in real estate and funds of funds
The two sectors with the largest percentage of retail investors – FoF with 31% and real estate with 21% – are also the sectors where the report finds potential issues linked to liquidity.
Many of the real estate funds offer daily liquidity, which indicates a structural vulnerability risk as they invest in illiquid assets while allowing investors to redeem their shares over a short timeframe.
For the FoF sector, there is a mismatch in liquidity, as 35% of the NAV is redeemable within a day, while only 24% of assets can be liquidated within that timeframe.
Increased use of leverage in hedge funds
Hedge funds amounted to €333bn in NAV, or 6% of all AIFs. However, when looking at gross exposure, they total 67% of all AIFs due to their increasing reliance on the use of derivatives.
These funds are exposed to financing risk, as one third of their financing is overnight. However, the fact that they maintain large cash buffers offers some security.
ESMA Chair Steven Maijoor commented: “In this second analysis of the data collected from AIFs, ESMA covers 99% of the market. The collection and analysis of data supports ESMA, and national competent authorities, in our work enhancing investor protection and promoting orderly and stable financial markets in the European Union.
"A detailed analysis of the liquidity risks of AIFs has highlighted that especially the categories with the highest percentage of retail investors are vulnerable to these risks. This should be considered by investors when making their investment decisions.
"This data will also support national competent authorities in their supervision of AIFs, and further strengthens supervisory convergence throughout the EU.”
• To view the full report click here