Home Breadcrumb caret Industry News Breadcrumb caret Industry Retail investors face liquidity risks in alt funds, European regulator says Alternative fund categories with the highest proportion of retail investors are especially vulnerable By James Langton | January 10, 2020 | Last updated on January 10, 2020 2 min read © naumoid / iStockphoto Retail investors who own alternative investment funds face possible liquidity risks, warns the European Securities and Markets Authority (ESMA) in a new report. The regulator said that its latest review of the region’s 30,357 alternative investment funds found that the sector had a collective net asset value (NAV) of €5.8 trillion, which represents almost 40% of Europe’s fund industry. The vast majority of alternative funds are sold to institutions (84%), but ESMA found that retail investor involvement “is significant at 16%,” and it noted the relationship between retail participation and liquidity risks. “A detailed analysis of the liquidity risks of [alt funds] has highlighted that especially the categories with the highest percentage of retail investors are vulnerable to these risks,” said Steven Maijoor, chair of ESMA. Retail investors accounted for 31% of the funds-of-funds category, and 21% of the real estate category, the report said. “Many of the funds in the real estate sector 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 time frame,” it said. In the funds-of-funds sector, ESMA cited a liquidity mismatch concern. In particular, it reported that 35% of the sector’s NAV is redeemable within a day, but that only 24% of funds’ assets can be liquidated daily. The regulator also noted that hedge funds have increased their use of leverage. “These funds are exposed to financing risk, as one-third of their financing is overnight,” the report said. “However, the fact that they maintain large cash buffers offers some security.” James Langton James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994. Save Stroke 1 Print Group 8 Share LI logo