European alternative investment funds (AIFs) saw their value increase by 11% to €5.8 trillion at the end of 2018, according to new research from Europe’s financial watchdog, following a range of new fund launches.
Research from the European Securities Markets Authority (ESMA) showed the net asset value (NAV) in the EU AIF sector amounted to nearly 40% of the total EU fund industry in 2018.
However, ESMA stated the growth in AIF NAV was associated to increased fund launches, rather than from ‘valuation effects’.
The report was based on data gathered from 30,357 AIFs, representing almost 100% of the market.
Within the AIFs, funds of funds accounted for 14% of the industry, following by real estate and hedge funds which represented 12% and 6% respectively. Private equity funds also represented 6%.
ESMA’s ability to publish the NAV of European AIFs followed the implementation of the reporting regime under the AIFMD regulation.
The hedge fund sector amounted to €333 billion in NAV, however, when looking at their gross exposure, they total 67% of all AIFs due to their increasing reliance on derivatives. The report stated hedge funds are exposed to financing risk, as one third of their financing is overnight.
“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,” said ESMA chair Steven Majioor.
“This data will also support National Competent Authorities (NCAs) in their supervision of AIFs, and further strengthens supervisory convergence throughout the EU.”
Investment managers will have to prepare for a range of new liquidity and stress guidelines running UCITS and AIF products in Europe.
The intervention came as a growing number of European regulators and investors express concern about the liquidity risk management practices at daily dealing UCITS funds, following the implosion at Neil Woodford’s Equity Income Fund.
The ESMA requirements, which will be applicable from 30 September 2020, stipulating that managers of UCITS and AIFs should stress test their funds’ assets and liabilities.