## Hedge Funds Improve Market Functioning, but Can Also Amplify Stress

_IMF Blog, October 6, 2026_

## Source details

**Canonical URL:** [Hedge Funds Improve Market Functioning, but Can Also Amplify Stress](https://www.imf.org/en/blogs/articles/2026/10/06/hedge-funds-improve-market-functioning-but-can-also-amplify-stress)

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## Bibliographic details
- Authors: Andrea Deghi, Taneli Makinen, Mahvash S Qureshi, Felix Suntheim
- Published: October 6, 2026

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### Role and growth of hedge funds
- Since 2013, gross assets under management have tripled, to $13 trillion.
- Gross notional exposures, which include on- and off-balance-sheet positions, are about $40 trillion.
- Hedge funds held about 9 percent of US Treasurys in 2025.
- Hedge funds invest and borrow with relatively few constraints, allowing investment in illiquid assets, extensive use of leverage, and rapid position adjustment.
- In normal times, these features support liquidity, price discovery, and risk sharing; in stressed conditions, they can transmit and amplify shocks.

### Vulnerabilities and amplification mechanisms
- Key balance-sheet vulnerabilities: leverage, crowded positions, and redemption pressures.
- Leverage sources cited: repurchase agreements, prime broker credit, and derivatives.
- Mechanism: rising volatility or tighter financing can trigger margin calls, forcing hedge funds to reduce exposures or unwind positions, shifting them from liquidity providers to amplifiers of market stress.
- Crowded trades and fast investor withdrawals can produce synchronized unwinds and self-reinforcing feedback loops among losses, deleveraging, and withdrawals.

### Empirical findings and metrics
- The analysis uses spikes in the CBOE Volatility Index (VIX) to measure periods of stress.
- Stocks most widely held by hedge funds are 10 percentage points more volatile than the least crowded stocks.
- Those crowded stocks suffer 4 percentage points deeper peak-to-trough losses than the least crowded stocks.
- Volatility and losses are larger when hedge funds holding these stocks experience simultaneous investor redemptions.
- Leverage amplifies these effects, underscoring the interaction of borrowing, crowded positions, and correlated investor withdrawals in magnifying shock transmission.

### Stress transmission channels
- Prime brokers (typically large dealer banks) provide financing and trading services; losses at hedge funds can weigh on these banks and reduce their capacity to lend during stress.
- Hedge fund stress can spill across borders: when the VIX rises and global risk sentiment deteriorates, stock markets with larger hedge fund presence tend to suffer larger declines.
- Cross-border and less liquid markets are particularly vulnerable because fewer buyers may be available to absorb sales when hedge funds reduce positions.

### Strengthening resilience: surveillance and policy calibration
- Surveillance gaps: many authorities lack information on leverage, derivatives exposures, prime broker relationships, and cross-border activities; improved reporting and information sharing is central to effective surveillance.
- Policy measures should be calibrated to the source of risk:
  - For synchronized deleveraging across many funds: market-wide measures such as minimum margins and haircuts, and stronger collateral management.
  - For concentrated risks in specific firms or exposures: entity- and concentration-based measures, including risk-based leverage limits, margin or capital add-ons, and large-exposure limits.
- Supervisory priorities:
  - Ensure prime brokers maintain strong counterparty risk management and monitor exposures to highly leveraged hedge funds.
  - Conduct system-wide stress tests to assess how hedge funds and counterparties respond to shocks and how pressures could propagate.
  - Early identification of vulnerabilities to prevent them from becoming systemic risks.

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## References

- [analytical chapter](https://www.imf.org/en/publications/gfsr/issues/2026/10/13/global-financial-stability-report-october-2026?cid=bl-com-am26-GFSREA2026002)

_Source: https://www.imf.org/en/blogs/articles/2026/10/06/hedge-funds-improve-market-functioning-but-can-also-amplify-stress_