Tougher Risk Parameters Limiting Hedge Fund Trading Activity

Funds are reducing trading activity in some areas because of increased or poorly understood risks

Credit trading is area most affected, Beacon Platform Inc. research shows

London October 21, 2024 Tougher risk parameters at hedge funds are restricting trading activity, with credit trading most likely to be affected, new global research* by Beacon Platform Inc. shows.

Almost all (93%) senior hedge-fund executives questioned said risk parameters are becoming stricter at their firm in terms of what they can and cannot trade. Almost all involved (95%) say they are having to reduce trading in some areas because of the growing risks or because they don’t have a good enough understanding of the risks in that area. 

Beacon’s research with 100 hedge-fund executives in the US, UK, Germany, Switzerland, France, Italy, Sweden, Norway, and Asia responsible for a collective $901 billion assets under management, revealed that most funds (84%) see trading restrictions as an increasing trend over the next three years, with 9% seeing a dramatic increase.

More than three out of four (76%) said they had seen restrictions on areas they can trade, while 56% said there were restrictions on the value of trades. Nearly half (46%) said the level of reporting they have to do has increased, and 23% say they have to wait for risk analysis before trades.

The study by Beacon, the cross-asset portfolio analytics and risk management platform for multi-strategy hedge funds, found credit trading is the area hedge fund executives believe is most likely to be reduced due to tighter risk parameters, as the table below shows.

Table 1: Hedge fund trading areas and percentage who think they will reduce trading activity. Respondents could select up to 3.

Area of hedge fund tradingPercentage of respondents
Credit71%
Currencies/FX50%
Equity48%
Commodities46%
Real estate43%
Derivatives39%

A related Beacon study reported that a surveyed group of institutional investors had some concerns about their hedge fund investments—85% have decided not to invest in a particular fund because of concerns over its risk management, and almost all (93%) think that this will be a growing trend.

The study also asked executives about their visibility of risks and what they are doing to improve it. Only 15% rated their hedge fund’s risk visibility as excellent, but 75% rated it as good, and just 10% as poor. 

When asked to rank the most important actions they had taken to improve visibility of risks, they listed as the top 3: 

  • Greater investment in technology (55%)
  • Having a platform that makes it easy to integrate and aggregate risk data across multiple asset types (54%), and 
  • Having a system that they can use quickly, but in a controlled fashion, revise or customise models and analytics to adapt to changing market conditions (48%)

Table 2: Percentage of asset owners who selected each of these options. Respondents could select up to 3.

Why has visibility of risks improved over the last 2 years?Percentage of respondents
Greater investment in technology55%
We have a platform that makes it easy to integrate data from multiple sources and aggregate risk across multiple asset types, books, and funds54%
We can quickly but in a controlled fashion revise/customise models and analytics to adapt to changing market conditions48%
Greater use of third parties who specialise in this area47%
We have invested more in growing our team/training41%
We’ve moved away from monolithic front-to-back systems to a more best of breed/open source approach that gives us the flexibility we need37%
We’ve moved quants/data scientists closer to the trading desk, making it faster and easier to evaluate and adapt investment strategies15%
We can experiment more because we can scale quickly to evaluate multiple scenarios, new risk factors3%

Kirat Singh, CEO and Co-Founder, Beacon Platform Inc. said: “As risk parameters at hedge funds become stricter, some firms are having to consider giving up certain types of trades or curtailing activity in certain sectors. That is putting additional pressure on the tools and technology needed to make these decisions. But it also opens up opportunities for those that can quickly develop a clearer understanding of new and different risk scenarios, and make informed trading decisions, faster.”

* Beacon Platform Inc. commissioned independent research company Pure Profile to interview 100 senior hedge fund executives in the US, UK, Germany, Switzerland, France, Italy, Sweden, Norway, and Asia collectively responsible for $901 billion assets under management. The research was conducted during August 2024 using an online methodology.

About Beacon

Beacon is a financial technology firm that provides everything quantitative developers need to rapidly build, test, deploy and share trading and risk applications, analytics and models. Developed by a team with unmatched financial markets experience, Beacon’s unified platform includes the apps, tools and infrastructure firms need to migrate their software and infrastructure to the cloud, manage risk across all asset classes, and focus on building innovative strategies that provide a competitive edge. For more information visit www.beacon.io