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Hedge funds have become increasingly influential players in global financial markets, but risks tied to leverage, fragile funding and crowded trades could worsen market turmoil during periods of stress, the International Monetary Fund said Tuesday.
The warning came in a chapter titled "Hedge Funds and Financial Stability," released ahead of the full Global Financial Stability Report due out Oct. 13.
According to the report, hedge funds' gross assets climbed from $4 trillion in 2013 to approximately $13 trillion by early 2026, reflecting the industry's expanding footprint across markets.
The IMF said that growth can be a source of liquidity and market efficiency under normal conditions, but the same dynamics can intensify price disruptions and liquidity pressures when financial conditions deteriorate.
The report singled out three vulnerabilities underlying the potential for instability: leverage, fragile funding structures and crowded trades, in which numerous funds hold similar positions simultaneously.
A sudden unwinding of such positions, the IMF suggested, could trigger outsized market moves if funds are forced to sell at the same time.
To address the risks, the IMF called for closing existing data gaps and strengthening monitoring of the sector, along with targeted measures aimed specifically at crowded positions and the risk of simultaneous deleveraging across funds.
In a blog post accompanying the report, IMF officials said hedge funds' growing presence was especially notable in government bond markets.
Funds held about 9% of US Treasury securities in 2025, the officials said, underscoring the sector's expanding role in a market central to global finance.
Officials noted that, unlike most other financial intermediaries, hedge funds face comparatively few restrictions on investing and borrowing.
That relative lack of constraint allows them to invest in illiquid assets, employ leverage extensively and adjust their positions quickly.
The IMF said those same characteristics that make hedge funds nimble, their ability to invest flexibly and move quickly, can support liquidity, price discovery and risk-sharing when markets are functioning normally.
But officials cautioned that in periods of market stress, those traits can instead transmit and amplify shocks across the broader financial system.
The Global Financial Stability Report is published twice a year by the IMF and is widely used by policymakers and investors to gauge risks to the global financial system.
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