EU regulator flags liquidity concerns for alternative investment funds

On the 04/08/21 at 6:30PM


Tuba Raqshan

The mismatch between the potential liquidity of the assets and the redemption timeframe offered to investors by Alternative Investment Fund (AIF) sector is worrisome for the European Securities and Markets Authority (ESMA).

Esma pointed out that this mismatch primarily affects real-estate funds and fund-of-funds. In real estate funds comprising 15% of EU AIFs NAV, the regulator added that such funds offering daily liquidity to monthly liquidity account for 50% of the Net Asset Value (NAV) and 44% of Commercial Real Estate (CRE) funds offer daily liquidity. However, the liquidity profile of RE funds (aggregate level) points to a significant mismatch as investors can redeem only 17% of the NAV within a month and only 10% of the assets can be liquidated within this time frame. This mismatch is prevalent for CRE and residential strategies, accounting for 81% of the NAV of this asset class.

Fund of Funds (FoFs), which account for 15% of NAV of EU AIFs, invest mainly in equity and bond Ucits (72% of identified fund exposures). However, investors are able to redeem only 39% of the NAV within a day, when most of these funds offer daily liquidity claims.

The size of the EU AIF universe expanded to reach €6.8trn in NAV at the end of 2019, recording a 15% increase from €5.9trn in 2018. Esma attributes this growth to the launch of new AIFs in 2019 and positive valuation effects.

The size of the European hedge fund sector remained stable in 2019 at €354bn, accounting for 5% of all AIFs. However, when measured by gross exposures, they account for 62% of AIFs as they rely heavily on derivatives. Leverage is very high at more than 900% after adjustments, especially for strategy relying on derivatives, added Esma. Private equity funds accounted for 7% of NAV of all AIFs (€456bn) and experienced the largest growth in 2019.

Esma added that European member states can allow non-EU asset managers to market alternative funds at national level without passporting rights, through the National Private Placement Regime (NPPR). These non-EU funds accounted for a fifth of the AIF market (€2.1trn).

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