The global funds management industry represents a low risk to financial stability based on liquidity and leverage metrics teased out in an inaugural study by the International Organization of Securities Commissions (IOSCO).
According to the newly released IOSCO report, data on three pooled investment categories – hedge funds, open- and closed-ended funds – suggests the industry as a whole is barely leveraged with more than sufficient liquidity.
The ‘Investment Funds Statistics Report’ says net leverage across the sector sits ranges from about 1.1-times assets for hedge and open-ended funds to 1.03-times for closed-ended vehicles.
Likewise, the IOSCO analysis found no liquidity concerns across the data sourced from 25 jurisdictions, representing about US$50 trillion and roughly 85,000 underlying funds.
“However, due to several important caveats including limited liquidity data for hedge funds and open-ended funds, it is difficult for the report to provide a full picture of potential risks, including with regards to counterparty risks and the funds’ ability to meet margin calls,” the report says. “As more jurisdictions implement changes to their reporting framework, IOSCO expects to be able to conduct a more thorough analysis of liquidity in the future.”
IOSCO, the global representative body of financial regulators, initiated the fund report in a bid to highlight emerging systemic risks of an industry that almost doubled in size since the 2008 crisis.
The rapid growth of growth of the asset management industry has “increased the number of questions raised about the potential risks to financial stability that investment fund activities may generate”, the report says.
IOSCO has collected global data only on hedge funds since 2018 – now incorporated into the wider study – adding open- and closed-ended products for the first time in the new report.
The analysis captures 2,546 hedge funds (up 19 per cent since 2018) valued at just over US$4 trillion as at 2020.
But the extra data adds almost US$46 trillion to the IOSCO study led by open-ended funds (US$43 trillion) and closed-ended funds (US$2.6 trillion).
In total, the report covers about “67% of total asset under management of the global investment funds universe”.
While 25 countries provided full sets of data to the IOSCO study – intended to be published each year – regulators from 25 nations, including NZ and Australia, opted-out of the project for now.
“The report will be published on an annual basis with the aim of presenting insights on the global investment funds industry and any potential emerging risks within it,” the paper says. “As more jurisdictions expand their reporting regimes, IOSCO expects the observations in this report to become more representative of the entire investment fund industry, including the open-ended fund universe, over time.”
Chaired by Hong Kong Securities and Futures Commission chief, Ashley Alder, IOSCO represents financial regulators from over 130 jurisdictions, or 95 per cent of markets.