ESMA has published is general “Trend, Risks and Vulnerabilities Report” (TRV)  in relation to the second half of 2017. It includes, as a specific article, the first EU-wide evidence on the AIF markets, based on AIFMD-reporting data, covering around 60% of the AIFs managed and/or marketed by EU asset managers, collected at the end of 2016. The article is relatively succinct and offers a “screenshot” of the AIF market in a point in time, rather than a comprehensive analysis. As a main takeaway, the author concludes that the AIF market is heterogeneous and that differences among the various components of this market should be taken into account when identifying and assessing potential risks. A few specifics risks have been highlighted, in relation to (i) concerns regarding the prevalence of fixed income strategies among the AIF market, and the related potential impact on prudential risks and (ii) potential liquidity mismatch in relation to specific strategies or AIFs types.

This article should be read having in mind the AIFMD review and how this data can feed policy makers’ future considerations.

A few notable facts from the report are:

• More than 80% of the AIFs are managed by AIFMs with passporting rights (as opposed to AIFs managed by subthreshold AIFMs who are not holding passporting rights), with a median net asset value (NAV) of EUR 30 mln per AIFs.
• The AIF industry seems to be dominated by large participants, and a large proportion of assets is heavily concentrated among a small pool of large funds: 2% of the funds are above EUR 1bn in size and hold 46% of the total NAV. 95% of the AIFs are sized below EUR 500mn and hold 40% of the NAV.
• AIF types classified under “Hedge funds” represent 2% of the assets concentrations, whereas funds classified as “other” (including commodity funds, infrastructure funds, fixed income funds, etc.) represent more than two third of the concentration of assets.
• As regards investment strategy, fixed income strategies hold the largest share in terms of NAV. According to ESMA, this specificity of the market should lead to a careful monitoring of the macro and micro prudential risk.
• Europe is the dominant investment region, with 65% of assets domiciled in the EEA.
• A specific section on liquidity risk, where hedge funds “show no signs of liquidity mismatch” thanks to their highly liquid strategies and to the high level of cash they maintain. Fund of Funds exposure to liquidity mismatch is greater due to a potential non-alignment of the redemption period they offer to their investors with the redemption period of the funds they are invested in.

More generally, the first part of the TRV covers the main risks and vulnerabilities of the current environment, with risks in the securities market being seen as very high, due to assets overvaluation and to the return of volatility. Credit risks linked to the low interest rate environment, including the potential repricing of risk premia, are also considered to remain high, despite the improvement of the macroeconomic environment.

For any questions on this report, please contact Marie-Adelaide de Nicolay