Beacon: Tougher risk parameters are limiting hedge fund trading activity

16 oktober 2024

Tougher risk parameters at hedge funds are restricting trading activity, with credit trading most likely to be affected, new global research by Beacon Platform Inc. shows.

Almost all (93%) senior hedge-fund executives questioned said risk parameters are becoming stricter at their firm in terms of what they can and cannot trade. Almost all involved (95%) say they are having to reduce trading in some areas because of the growing risks or because they don’t have a good enough understanding of the risks in that area. 

Beacon’s research with 100 hedge-fund executives in the US, UK, Germany, Switzerland, France, Italy, Sweden, Norway, and Asia responsible for a collective $901 billion assets under management, revealed that most funds (84%) see trading restrictions as an increasing trend over the next three years, with 9% seeing a dramatic increase.

More than three out of four (76%) said they had seen restrictions on areas they can trade, while 56% said there were restrictions on the value of trades. Nearly half (46%) said the level of reporting they have to do has increased, and 23% say they have to wait for risk analysis before trades.

The study by Beacon, the cross-asset portfolio analytics and risk management platform for multi-strategy hedge funds, found credit trading is the area hedge fund executives believe is most likely to be reduced due to tighter risk parameters, as the table below shows.

A related Beacon study reported that a surveyed group of institutional investors had some concerns about their hedge fund investments—85% have decided not to invest in a particular fund because of concerns over its risk management, and almost all (93%) think that this will be a growing trend.

The study also asked executives about their visibility of risks and what they are doing to improve it. Only 15% rated their hedge fund’s risk visibility as excellent, but 75% rated it as good, and just 10% as poor.