LPA Commentary: ESMA Highlights Leverage Risks in AIFs and UCITS – Solutions for Secure Risk Management

Frankfurt am Main, 28 April 2025 – On 24 April 2025, the European Securities and Markets Authority (ESMA) published its annual risk assessment of leveraged alternative investment funds (AIFs) alongside its first in-depth analysis of risks in UCITS funds employing the absolute Value-at-Risk (VaR) model. Both analyses underscore the growing need for professional risk and leverage management in the fund sector – a focus that is also central to LPA Lucht Probst Associates.

Rising Risks from Leverage in AIFs and UCITS

ESMA finds that while the majority of EU investment funds make only limited use of leverage, certain groups – notably hedge funds and a subset of UCITS – demonstrate significantly elevated leverage risks. Hedge funds exhibit the highest levels of leverage, despite representing a relatively small portion of the market. Furthermore, real estate (RE) funds are facing pressures in some jurisdictions, driven by declining property prices and fund outflows.

Particular attention is drawn to a small but significant group of UCITS funds employing the absolute VaR approach: around 2% of these funds present risk profiles more akin to hedge funds, characterised by complex derivative exposures, high gross leverage, and heightened sensitivity to market movements. Notably, these funds manage larger assets than the entire EU hedge fund sector combined, amplifying their potential systemic relevance.

Effective Risk Management Becomes Critical

The ESMA’s findings highlight that fund managers, especially those employing leverage and complex derivatives, must increasingly address regulatory expectations and supervisory scrutiny. Timely and precise risk identification, as well as effective management, are paramount to safeguarding both investor interests and regulatory compliance.

LPA Supports Asset Managers with Innovative Solutions

At LPA Lucht Probst Associates, we offer comprehensive support to asset managers navigating these challenges. Through our platform Capmatix Regulations, we enable the automated and consistent implementation of regulatory requirements, including risk reporting, leverage disclosures, and stress testing.

Our solutions help asset managers to:

• Monitor risks arising from leverage and complex derivative exposures transparently and automatically,
• Ensure compliance with regulatory reporting standards (e.g., AIFMD, UCITS),
• and Establish early warning systems for liquidity and market risks.

Our solution delivers end-to-end data management, accurate reporting, and proactive risk control fully aligned with the latest regulatory standards. Through automated look-through capabilities and intelligent data enrichment (CIC, NACE, LEI), we ensure maximum transparency and seamless compliance — not only meeting today’s ESMA expectations but empowering asset managers to stay ahead of tomorrow’s regulatory landscape.

Conclusion

ESMA’s latest analysis once again demonstrates that professional leverage and risk management are no longer optional – they are essential for the future viability of fund managers. With LPA’s solutions, asset managers can meet regulatory demands efficiently whilst achieving operational excellence.