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ESMA monitoring hedge funds with 2,000% leverage

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A group of hedge funds with exposure to mortgage bonds and average gross leverage in excess of 2,000% has attracted the attention of the European Securities and Markets Authority (ESMA) over concerns of potential market risk, according to a report by Bloomberg.

The report cites a new ESMA report as outlining the risks posed by leveraged alternative investment funds, with the group of hedge funds reportedly accounting for as much as 15% of trading in the local mortgage-backed note market.

While ESMA notes that their share of the market has remained stable during region periods of stress including the pandemic and Russia’s invasion of Ukraine, the funds are predominantly buyers in rising markets and sellers during a downturn, an approach which the regulator believes can compound market moves and as well as being an added source of instability.

Of the 130 hedge funds in ESMA’s sample, around a tenth have a leverage ration of over 2048%, while their median commitment is more than 500%, putting them among the most leveraged alternative investment funds.

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