Hedge funds are facing tighter risk parameters, leading to a reduction in trading activity, particularly in credit trading, according to research by fintech firm Beacon Platform Inc.
The study, which surveyed 100 senior hedge-fund executives responsible for a collective $901 billion in assets under management, highlighted the growing trend of funds restricting trading due to increasing or poorly understood risks.
93% of hedge fund executives reported stricter risk parameters, limiting what they can trade, while 95% said they have reduced trading in certain areas because of the increasing risks or lack of clarity around them. Credit trading emerged as the most affected area, with hedge funds scaling back activity in response to tighter risk controls.
The research revealed that the majority of hedge funds (84%) anticipate an increasing trend of trading restrictions over the next three years, with 9% expecting a dramatic rise. In fact, 76% of executives reported seeing restrictions on the types of assets they can trade, and 56% noted limits on the value of trades they can execute. Additionally, 46% reported increased levels of reporting, and 23% indicated that they must wait for risk analysis before making trades.
Pension funds expect to increase hedge fund allocations
The study also showed that institutional investors share concerns about hedge funds’ risk management practices. A related survey found that 85% of institutional investors had declined to invest in a particular fund due to risk management concerns, and 93% believe that risk-related restrictions will continue to grow.
To improve risk visibility, hedge funds are increasingly investing in technology. The top actions taken to enhance risk management include greater investment in technology (55%), integrating and aggregating risk data across multiple asset types (54%), and using systems that allow for quick, controlled revisions of models and analytics (48%).
Kirat Singh, CEO and co-founder, Beacon Platform Inc. said: “As risk parameters at hedge funds become stricter, some firms are having to consider giving up certain types of trades or curtailing activity in certain sectors. That is putting additional pressure on the tools and technology needed to make these decisions. But it also opens up opportunities for those that can quickly develop a clearer understanding of new and different risk scenarios, and make informed trading decisions, faster.”
