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Hedge funds’ assets have more than tripled since 2013 to about $13 trillion, expanding their role in trading, liquidity and risk transfer while increasing the potential for their positions to amplify market turmoil, the International Monetary Fund said on Tuesday, October 6. The fund’s analysis urged policymakers to improve monitoring of the sector, whose borrowing and derivatives exposures can be difficult to observe.
The IMF said hedge funds’ gross notional exposures were about $40 trillion and that they held around 9% of the U.S. Treasury market in 2025. The figures underscore why the funds’ activity matters beyond their own investors: rapid position changes or forced sales can affect asset prices and the financial firms that lend to them.
The findings appeared in an IMF analysis published ahead of the institution’s full Global Financial Stability Report, scheduled for October 13. The IMF’s message was two-sided: hedge funds can support market functioning in ordinary conditions, but leverage, crowded positions and investor withdrawals can turn them into channels through which stress spreads.
A larger role in trading and government bonds
The IMF’s analysis said hedge funds’ gross assets under management rose from about $4 trillion in 2013 to $13 trillion in early 2026. Reuters, reporting on the release, said the sector’s growth has relied substantially on leverage, including synthetic leverage created through derivatives rather than conventional borrowing alone.
That expansion has accompanied a larger presence in sovereign debt markets. Hedge funds accounted for about 9% of the U.S. Treasury market in 2025, compared with 4% in 2022, according to the IMF figures reported by Reuters. Their trades can add buyers and sellers to markets and help investors transfer risk, but the scale of their participation also makes their response to a shock more consequential.
Gross notional exposure is a measure of the face value of positions, including on- and off-balance-sheet activity; it is not the same as money invested or potential losses. The IMF’s estimate of roughly $40 trillion therefore indicates the breadth of positions rather than a direct measure of funds’ net risk.
How leverage can intensify market stress
Hedge funds may borrow through repurchase agreements and credit from prime brokers, while derivatives can create exposure without requiring the full value of an underlying position to be funded upfront. The IMF said that when volatility rises or financing tightens, margin calls can force funds to cut risk or close positions, potentially reducing liquidity precisely when markets are under pressure.
The vulnerability can be compounded when multiple funds hold similar or crowded positions and their investors seek withdrawals at the same time. The IMF’s analysis identified leverage, crowded trades and redemption pressure as interacting risks: synchronized sales can depress prices, increase losses and prompt further deleveraging or withdrawals.
In its analysis of equities, the IMF found that stocks most widely held by hedge funds were 10 percentage points more volatile than the least crowded stocks and experienced peak-to-trough losses 4 percentage points deeper. It said these effects were larger when funds holding those shares faced simultaneous investor redemptions, and that leverage amplified the relationship. The findings describe patterns in the analysis, not a claim that hedge fund ownership alone causes every market decline.
Potential spillovers to banks and overseas markets
Prime brokers, typically large dealer banks, provide hedge funds with financing and trading services. The IMF warned that losses at funds can affect these lenders and potentially weaken their ability or willingness to provide financing during stressed conditions, creating a transmission channel from fund positions to wider financial markets.
The IMF also said stress can cross borders. Its analysis found that when the VIX rises and global risk sentiment deteriorates, equity markets with a larger hedge fund presence tend to experience bigger declines. Markets with fewer buyers and less capacity to absorb sales may be more exposed if funds reduce positions quickly.
This makes the issue one of interconnectedness as well as fund size. A hedge fund’s trading decisions can affect counterparties, while the financing terms and collateral demands imposed by those counterparties may in turn influence how quickly the fund must shrink its positions.
IMF calls for better data and targeted safeguards
The IMF said information gaps remain a barrier to effective oversight, particularly around leverage, derivatives exposures, relationships with prime brokers and cross-border activity. It called for better reporting and information sharing so authorities can assess risks across firms and markets rather than relying on partial views of individual exposures.
The proposed policy response depends on where a vulnerability lies. For risks involving synchronized deleveraging across many funds, the IMF pointed to market-wide approaches such as minimum margin and haircut standards and stronger collateral management. For concentrated risks at particular firms or in particular exposures, it listed possible entity- or concentration-based tools, including risk-based leverage limits, margin or capital add-ons and large-exposure limits.
The IMF also identified stronger prime-broker counterparty-risk management and system-wide stress tests as supervisory priorities. The full Global Financial Stability Report is scheduled for release on October 13; the October 6 analysis did not set out a finalized regulatory package or a timetable for adopting specific measures.
