(Bloomberg) — European regulators are closely following a group of hedge funds with exposure to mortgage bonds and average gross leverage in excess of 2,000%, a position so large it risks impacting markets.
The funds predominantly are buyers in rising markets and sellers during a downturn, according to a Tuesday report by the European Securities and Markets Authority about the risk posed by leveraged alternative investment funds. It’s an approach to trading that tends to compound market moves and can be an added source of instability.
The group represents as much as 15% of trading in the local mortgage-backed note market, the regulator said, without identifying which jurisdictions or specific funds. Their share has remained stable throughout recent episodes of stress, including the pandemic and Russia’s invasion of Ukraine, the report added.