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Esma reports AIF assets and highlights liquidity risks

European AIFsNearly 40% of assets under management in the EU funds industry is made up of alternative investment funds (AIFs), latest figures show.

The European Securities and Markets Authority (Esma) said there were €5.8 trillion of net assets in AIFs based on data from over 30,300 of the products.

Esma found the AIF sector broke down as follows:

  • Funds of funds – 14%
  • Real estate – 12%
  • Hedge funds – 6%
  • Private equity funds – 6%
  • Other – 61%

AIF products were largely created to help institutional investors gain access to private equity and hedge fund investments, yet the largest sector of the AIF market, referred to as ‘Other’, makes up 61% of industry assets. About 30% of the ‘Other’ category were strategies that Esma said were hard to identify due to a lack of manager information, but about 67% of ‘Other’ were fixed income and equity strategies and the funds in general had relatively low leverage.

Diana Mackay, managing director of global distribution solutions at Broadridge Analytics Solutions, told a Funds Europe ‘Global Industry’ roundtable recently (due to be published this month) that distributors call for alternatives and products that are uncorrelated with public markets, yet they “still only want to invest in Ucits-regulated funds”.

She added: “You see this also with institutions – a lot just want the regulation that surrounds Ucits – and even though you have more or less equivalent regulation with AIFs, you’ll hear distributors say they’d buy it if it was a Ucits. That huge comfort factor prevents big take-up of anything that’s in the more alternative space.”

However, the Luxembourg industry recently reported that the number of private equity funds domiciled there with more than €1 billion in assets had doubled over a year - and the Esma report itself also says private equity funds experienced the largest growth in 2018 (+66% compared with 2017).

Esma found liquidity risk was a significant issue in real estate and funds of funds, as many funds in the real estate sector offer daily liquidity while the assets they invest in are not liquid. This indicates a “structural vulnerability risk”, Esma said.

There is also a mismatch of liquidity in the funds of funds sector, with 35% of the total net asset value redeemable within a day, while less than a quarter of underlying assets can be liquidated within that timeframe.

Real estate and funds of funds were the two sectors with the largest percentage of retail clients invested. Over 30% of the funds of funds industry is made up of retail clients, while they made up 21% of real estate.

Steven Maijoor, chair of Esma, said: “A detailed analysis of the liquidity risks of AIFs has highlighted that especially the categories with the highest percentage of retail investors are vulnerable to these risks. This should be considered by investors when making their investment decisions.”

Hedge funds were also found to be exposed to financing risking as one third of their financing happens overnight. The fact they maintain large cash buffers, however, offers some form of security.

According to the study, most AIFs are sold to professional investors (84%) with retail participation at 16%.

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