Hedge funds are scaling back trading in response to stricter risk controls, with credit trading being the hardest hit, according to a new global survey of 100 senior hedge fund executives across the US, UK, Europe, and Asia by Beacon Platform Inc.
The research reveals that 93% of firms are facing tighter risk parameters, limiting what they can trade with nearly all respondents (95%) admitting to reducing trading activity in some areas, citing either increasing risks or insufficient understanding of certain market risks.
The study highlights growing caution within the hedge fund sector, particularly over the next three years, with 84% of respondents expect trading restrictions to increase. Notably, 9% of respondents predict a dramatic rise in these limitations. Vredit trading is seemingly the most affected, with many hedge fund executives indicating that they are scaling back activity in this area due to heightened risk.
In addition to credit trading, more than three-quarters (76%) of hedge funds reported restrictions on which markets they can access, while 56% faced limitations on the value of their trades. Almost half (46%) said they have seen an increase in the level of risk reporting required, and 23% noted delays in trades due to the need for prior risk analysis.
Beacon’s research also highlighted institutional investors’ growing concerns about hedge funds’ risk management practices. A significant 85% of investors surveyed said they had opted not to invest in a particular fund due to worries about risk controls, and 93% believe this concern will increase.
The study further explored the steps hedge funds are taking to improve risk visibility. While only 15% of respondents rated their visibility as “excellent,” 75% said it was “good.” The most common strategies for enhancing risk management included investing in technology (55%), integrating risk data across asset types (54%), and quickly revising models to adapt to market conditions (48%).
