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Leveraged investment funds: A framework for assessing risks and designing policies

Author

Listed:
  • Bouveret, Antoine
  • Ferrari, Massimo
  • Grill, Michael
  • Molestina Vivar, Luis
  • Schmidt, Daniel Jonas
  • Weistroffer, Christian

Abstract

This article develops a framework for assessing risks and formulating policies for leveraged alternative investment funds by integrating entity-level information for investment funds with transaction-level data on derivatives and repurchase agreements. Combining both types of data allows us to better understand the use of leverage in alternative investment funds and assess its implications for financial stability. Using a comprehensive set of risk metrics, our analysis identifies hedge funds and liability-driven investment (LDI) funds as the most vulnerable to leverage-related risks. We demonstrate the usefulness of our framework for risk assessment by analysing the sensitivity of leveraged funds to interest rate shocks. We find that LDI funds may face significant liquidity needs and mark-to-market losses. Hedge funds appear to be more resilient to this type of shock, but depending on their investment strategy, they could be sensitive to other risk factors. Our framework allows us to flexibly analyse other risk scenarios and to evaluate regulatory measures in terms of both their effectiveness and their precision in addressing potential vulnerabilities arising from leverage. JEL Classification: G11, G15, G23.

Suggested Citation

  • Bouveret, Antoine & Ferrari, Massimo & Grill, Michael & Molestina Vivar, Luis & Schmidt, Daniel Jonas & Weistroffer, Christian, 2025. "Leveraged investment funds: A framework for assessing risks and designing policies," Macroprudential Bulletin, European Central Bank, vol. 26.
  • Handle: RePEc:ecb:ecbmbu:2025:0026:2
    Note: 1280809
    as

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    More about this item

    Keywords

    hedge funds; investment funds; LDI funds; Leverage; risk metrics.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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