IMF warns hedge funds’ leverage could amplify market shocks

Hedge funds have more than tripled in size over the past ten years. According to the International Monetary Fund, gross assets rose from $4 trillion in 2013 to about $13 trillion in early 2026, and most of that growth came from leverage. On Tuesday, October 6, the IMF warned that the industry's opacity and borrowing could make market stress worse. The findings are Chapter 2 of the October 2026 Global Financial Stability Report. The IMF published the chapter at 10:15 a.m. ET, ahead of Chapter 1, which is due on October 13 during the IMF and World Bank annual meetings in Bangkok.reuters+2

The report credits hedge funds with improving market efficiency, liquidity and price discovery in normal times. It warns that when conditions worsen, high leverage, crowded trades and investors' sensitivity to performance can quickly turn the funds from suppliers of liquidity into seekers of it. The IMF called the sector "inherently opaque," which makes its risks hard to measure, according to Reuters.english.ahram+1

Leverage and the Treasury market

The IMF said growth has come mainly through leverage, including synthetic leverage built with derivatives. Since 2013, the gap between the funds' gross and net assets has widened by nearly $6 trillion. The funds rely on repurchase agreements to finance sovereign bond positions and on prime brokerage financing for equity positions. As a result, margin calls can force fast sales that feed a cycle of falling prices and more margin calls.reuters+1

Hedge funds held 9% of the U.S. Treasury market in 2025, up from 4% in 2022. Much of the increase came from leveraged cash-futures "basis trades". The IMF warned that if dealer capacity is limited or funding tightens, forced unwinding of these trades could spread stress through Treasury securities and futures. It also flagged carry trades funded in Japanese yen and Swiss francs as a source of risk.english.ahram+1

Concentration and contagion

More than 80% of the sector's assets sit in funds based in four jurisdictions: the U.S., the Cayman Islands, Luxembourg and Ireland. The five largest prime brokers serve about two-thirds of hedge fund clients, so losses at funds could pass directly to banks. The IMF said stocks exposed to crowded hedge fund trades fell about 4 percentage points further during stress periods, and their volatility was about 10 points higher.english.ahram

Calls for data and safeguards

The IMF urged authorities to close data gaps on leverage, derivatives exposures, securities financing and links to prime brokers. It also called for systemwide stress tests and for minimum margin and haircut requirements. Where risks are concentrated in particular funds, it said authorities could consider risk-based leverage limits. It also recommended targeted central bank backstops, designed to limit moral hazard.democrata+1

"These measures, carefully calibrated, can reduce vulnerabilities while preserving the beneficial role that hedge funds play in financial markets," the IMF said. It added that few jurisdictions have these tools because hedge funds are generally not subject to prudential regulation.democrata