Hedge funds are facing a tightening of risk parameters, leading to a decline in trading activity, particularly in margin trading, according to a study by fintech firm Beacon Platform.
The study surveyed 100 senior hedge fund executives responsible for $901 billion in assets under management and found that funds tend to limit trading due to increased or poorly understood risks. This highlighted the fact that
93% of hedge fund executives report that risk parameters have tightened, limiting what they can trade, and 95% have moved away from certain areas due to increased risk or lack of risk clarity. respondents said they were reducing their transactions. The most affected sector is margin trading, where hedge funds are scaling back their activities in response to tightening risk management.
The survey revealed that the majority of hedge funds (84%) expect trading restrictions to trend upward over the next three years, with 9% expecting a dramatic increase. In fact, 76% of executives reported that there are restrictions on the types of assets they can trade, and 56% noted that there are restrictions on the amount of trades they can make. Additionally, 46% reported increased levels of reporting and 23% said they would need to wait for a risk analysis before making a trade.
Pension funds expect to increase allocations to hedge funds
The survey also showed that institutional investors share concerns about hedge funds’ risk management practices. A related survey found that 85% of institutional investors have declined to invest in a particular fund due to risk management concerns, and 93% believe risk-related restrictions will continue to increase.
To increase risk visibility, hedge funds are increasing their investments in technology. Key actions being taken to improve risk management include increasing investment in technology (55%), integrating and aggregating risk data across multiple asset types (54%), and increasing the speed and control of models and analytics. and the use of systems that allow for revised revisions (48%). .
Kirat Singh, co-founder and CEO of Beacon Platforms, said: “As hedge fund risk metrics become more stringent, some firms are moving away from certain types of trades or “We are now having to consider reducing activities in the sector.” This puts added pressure on the tools and technology needed to make these decisions. But it also opens up opportunities for those who can quickly and clearly understand new and different risk scenarios and make informed trading decisions faster. ”
