European Hedge Funds Hit €660 Billion as Regulators Eye Leverage Risks
The total value of hedge funds in the eurozone reached around €660 billion in the third quarter of 2025, accounting for roughly 3% of the total assets under management in the investment fund sector, according to a focus report published by the European Central Bank.
The ECB noted that hedge funds represent a "relatively small segment" of the eurozone's investment fund industry, encompassing both alternative investment funds (AIFs) and UCITS hedge funds. While AIF hedge funds, typically catering to high-net-worth investors, pose limited systemic risks due to their limited liquidity and lock-up periods, the central bank flagged potential vulnerabilities around UCITS hedge funds, which are more accessible to retail investors.
"UCITS hedge funds often allow investors to redeem shares with high frequency, which could lead to the accumulation of risks during periods of market stress," the ECB said, adding that regulators should equip themselves with adequate tools to limit excessive leverage in UCITS and mitigate such risks.
The findings come as policymakers across Europe grapple with the growing influence of the alternative asset management industry. Hedge funds have steadily expanded their footprint, attracted by the region's deep pool of institutional capital, even as they face heightened scrutiny over their potential to amplify market volatility.
"Regulators are understandably concerned about the leverage and liquidity risks that hedge funds can pose, especially those accessible to retail investors," said a senior executive at a leading European asset manager, who spoke on the condition of anonymity. "The challenge will be striking the right balance between safeguarding financial stability and preserving the benefits that hedge funds can bring to a diversified portfolio."
The ECB data showed that eurozone insurance companies and households each hold around 15% of UCITS hedge fund shares, underscoring the need for robust risk management frameworks. Industry experts say the central bank's focus on these issues is timely, as policymakers seek to strengthen the resilience of the region's financial system in the face of potential market shocks.
"Regulators will need to carefully monitor leverage, liquidity, and interconnectedness within the hedge fund space to prevent any pockets of vulnerability from destabilizing the broader market," said the asset management executive. "Striking that balance will be critical in the years ahead."
The rapid growth of the eurozone hedge fund industry to €660 billion has caught the attention of regulators, who are closely monitoring the rising leverage levels within this segment. This concentration of risk highlights the need for enhanced oversight to ensure financial stability, as the ECB aims to mitigate potential systemic threats posed by highly leveraged hedge fund activities.