Leveraged AIFs – ESMA publishes its 2025 Risk Assessment

On 6 May 2026, ESMA published its 2025 Annual risk assessment of leveraged Alternative Investment Funds (AIFs), based on end‑2024 AIFMD data.

The report finds that, while most AIFs do not employ substantial leverage, a concentrated minority of funds and specific strategies continue to warrant close supervisory attention.

Overall picture and key numbers

ESMA and National Competent Authorities (NCAs) assessed 4,445 funds with EUR 3.8tn in NAV.

These comprised:

• 3,266 funds that either employ leverage on a substantial basis (i.e., commitment leverage of above 300%) and/or have AuM above EUR 500m and

• 1,179 funds flagged by NCAs as having unusually high leverage.

The "Other AIFs" (AIFs that do not fit into specific, more strictly defined categories and include GBP-denominated Liability-Driven Investment (LDI) funds) category remains dominant, accounting for 51% of NAV in the sample, followed by real estate (16%), funds of funds (14%), private equity (12%) and hedge funds (1%). Around 5% of funds are not reported under any category.

Leverage has declined on average across categories mainly due to stricter outlier removal. Among substantially leveraged funds, median commitment leverage fell from 530% to 446%, while the upper decile remains high at 1,787% (down from 3,633% in 2023). Overall, 90% of funds report a leverage ratio below 157%

Liquidity remains a central concern to ESMA. Across open‑ended AIFs, 68% of shares can be redeemed weekly, yet only 37% of assets can be liquidated within one week - this implies an aggregate one‑week liquidity mismatch of around 7% of NAV. This is driven in particular by funds of funds, real estate funds and "other AIFs".

Key developments since the last assessment

1. Shift in sector composition and growth in private equity

The composition of the leveraged AIF universe has evolved.

• "Other AIFs" continue to represent about half of the sample by NAV, while real estate funds' share has declined to 16%.

• The private equity sector has expanded rapidly:

  • The PE fund sample rose 28% since 2024, with Article 25 NAV increasing to EUR 467bn (from EUR 323bn in 2023).

  • The broader PE fund sector has nearly doubled in size since 2020 to around EUR 821bn.

  • Reported leverage in PE funds remains low, but ESMA notes that much of the leverage sits in portfolio companies or SPVs, making total leverage less transparent.

2. Refined view on liquidity mismatches and use of liquidity management tools (LMTs)

ESMA and NCAs provide a more granular assessment of liquidity risk by taking greater account of LMTs such as notice periods and redemption gates.

• In real estate funds, 70% of those offering daily or weekly redemptions apply notice periods of six months or more.

• ESMA notes that raw liquidity mismatch metrics may overstate actual risk where effective LMTs are in place

3. Real estate funds under pressure but broadly resilient

Real estate funds continue to operate in a challenging market environment.

• Commercial real estate (CRE) prices in the euro area are about 14% below 2021 levels, and the Stoxx 600 real estate index fell by 32% in 2024.

• By contrast, RE fund valuations increased on average by 3% in 2024, with significant cross‑country divergence

ESMA highlights that EU RE funds manage around 23% of EU CRE assets. Despite valuation declines and outflows in some markets, the sector has so far absorbed pressure with limited use of suspensions and no broader systemic fallout, aided by notice periods, gating and other LMTs.

4. Hedge funds: high leverage, derivatives‑driven strategies and margin dynamics

Hedge funds remain the most leveraged AIF category, particularly in macro and relative value strategies that rely heavily on derivatives and repo financing.

• ESMA's sample includes 130 hedge funds, of which 80 are substantially leveraged. Their AuM (including derivatives) has increased from EUR 210bn to EUR 339bn, around 20 times their NAV.

• Median commitment leverage for substantially leveraged hedge funds is 646%, with a small number of funds reporting ratios above 2,700%.

ESMA places greater emphasis on margin‑related liquidity risk:

• Initial margins on derivatives are about 18% of NAV.

• The median ratio of initial margins to unencumbered cash has increased from 23% to 53%, though it has fallen sharply for the most exposed funds, suggesting stronger liquidity buffers in the riskiest cohort.

No single hedge fund strategy is identified as systemically risky on AIFMD data alone, but NCAs continue to scrutinise crowded trades and jurisdiction‑specific concentrations.

5. "Other AIFs": corporate bond exposure and LDI developments

The heterogeneous "other AIFs" category remains central to ESMA's systemic risk analysis:

• These funds hold EUR 3.6tn in securities, including EUR 526bn in corporate bonds, around 13% of all EU non‑financial corporate debt securities.

• Most "other AIFs" offer daily redemptions, creating an apparent one‑week liquidity shortfall of about 6% of NAV, mitigated in practice by predominantly institutional, long‑term investors and the use of LMTs.

Liability‑driven investment (LDI) funds receive particular attention following the 2022 UK gilt stress:

• GBP‑denominated LDI funds manage around EUR 362bn of assets (EUR 88bn NAV), and EUR‑denominated LDI funds around EUR 141bn (EUR 35bn NAV).

• In response to the 2022 episode, Ireland and Luxembourg imposed a binding 300bps yield-buffer requirement on GBP LDI funds under Article 25 AIFMD.

• While not a formal leverage cap, the buffer constrains leverage by ensuring liquidity for margin and collateral calls, with 67% of GBP LDI NAV now in non‑substantially leveraged funds.

Systemic risk channels and overall assessment

Across the four main systemic risk channels - (i) market impact, (ii) fire sales, (iii) direct spillovers to financial institutions and (iv) interruption of credit intermediation - ESMA's overall conclusion is that:

• Leverage is concentrated in a relatively small set of funds and strategies (notably hedge funds, some real estate funds, LDI funds and certain "other AIFs"), rather than being widespread across the AIF universe.

• Liquidity mismatches are material in specific segments (funds of funds, real estate, "other AIFs") but are partly mitigated by LMTs and predominantly institutional investor bases.

• AIFs play a non‑negligible role in credit provision. For example, "other AIFs" hold around 13% of EU non‑financial corporate debt securities, implying that severe stress in these segments could affect real‑economy financing.

ESMA and NCAs therefore maintain a cautious stance, with intensified monitoring of high‑leverage cohorts, liquidity‑mismatched strategies and systemically important sub‑sectors such as real estate, LDI and corporate bond funds.