ESMA Monitoring of EU AIFs Increases
On 30 January 2024 the European Securities & Markets Authority (ESMA) published their findings regarding the risks that leveraged Alternative Investment Funds (AIFs) pose within the EU. In particular, the findings highlighted the risks of real estate funds in jurisdictions where circumstances of declining prices and volume of transactions are prominent. Such revelations have led ESMA to notably increase their monitoring of these AIFS with the aim of better managing these risks.
Real Estate Funds: Key Findings
The assessment revealed that due to the large share of open-ended real estate funds which offer daily or recurrent redemptions to investors, existing liquidity mismatches are often amplified. Hence jurisdictions where this type of real estate funds hold the greatest proportion of the market are considerably more vulnerable to such risks, one example being Austria which was found to have an average liquidity mismatch of 82% of NAV within one week, which was correlated to the fact that most Austrian real estate funds are open ended.
Overall Sector Findings:
- Decline in value of alternatives sector mainly caused by valuation losses experienced during unpropitious market developments in 2022, in particular for funds exposed to equities and bonds.
- Various risks faced by real estate funds associated with market footprint, leverage, valuation discrepancies and liquidity mismatches.
- Potential risk of market impact due to high leverage of hedge funds.
- Liability Driven Investment (LDI) funds which acquire leveraged exposures to the UK government bond market have demonstrated consistent heightened levels of risk, as reported by national competent authorities.
