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Matthias Knab, Opalesque for New Managers: Hedge funds make markets work better in normal times, but their leverage, crowded positions and exposure to redemptions can turn them into amplifiers of stress when conditions deteriorate. That is the conclusion of a new IMF blog by Andrea Deghi, Taneli Makinen, Mahvash S. Qureshi and Felix Suntheim. The blog previews an analytical chapter of the IMF's October 2026 Global Financial Stability Report.
A much larger footprint
The authors note that hedge fund gross assets under management have tripled since 2013, to $13 trillion. Gross notional exposures, including on- and off-balance-sheet positions, are around $40 trillion. In 2025, hedge funds held about 9% of US Treasurys.
In normal times, the IMF says, hedge funds support liquidity, price discovery and risk sharing. Under stress, however, their leverage, less liquid holdings and ability to reposition quickly can magnify shocks.
Leverage, crowding and redemptions
The IMF identifies three main vulnerabilities: leverage, crowded positions and redemption pressure. Leverage comes mainly from repurchase agreements, prime broker credit and derivatives. When volatility rises or financing tightens, margin calls can force sales, and hedge funds shift from providing liquidity to absorbing it.
To measure the effect, the researchers used spikes in the VIX to identify periods of market stress. In those periods, the most widely held stocks were 10 percentage points more volatile than the least crowded ones, and their peak-to-trough losses were 4 percentage points deeper. Volatility and losses were larger still when the funds holding those stocks faced redemptions at the same time, and leverage amplified both effects.
How stress spreads
Hedge fund losses can also spill over to prime brokers, which are typically large dealer banks, and reduce their capacity to lend. Stress crosses borders too: when the VIX rises, stock markets with a larger hedge fund presence tend to fall further. Less liquid markets and markets that depend on cross-border investors are especially exposed, because fewer buyers may be available when funds sell.
What the IMF recommends
The starting point is data. According to the IMF, many authorities still lack adequate information on hedge fund leverage, derivatives exposures, prime broker relationships and cross-border activity, and better reporting and information sharing between authorities should be central to surveillance.
Policy tools should be matched to the source of risk. If the danger is synchronized deleveraging across many funds, market-wide tools are more appropriate, such as minimum margins, haircuts and stronger collateral management. Where risk is concentrated in particular firms or exposures, entity-based tools fit better, such as risk-based leverage limits, margin or capital add-ons, and large-exposure limits.
On the supervisory side, the IMF wants prime brokers to have strong counterparty risk management and to monitor their exposures to highly leveraged funds. It also calls for system-wide stress tests that capture how funds and their counterparties respond to shocks, so that vulnerabilities are identified before they become systemic.
Read the IMF blog here. The full analysis appears in the IMF Global Financial Stability Report, October 2026.
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