Hedge funds have more than tripled in size over the past decade and are becoming increasingly important to global financial markets, prompting the International Monetary Fund (IMF) to call for closer scrutiny of their leverage, interconnectedness, and opaque positions.
Hedge funds held about USD 13 trillion in gross assets in early 2026, up from roughly USD 4 trillion in 2013, according to a new chapter of the IMF’s Global Financial Stability Report.
Their total notional exposure, including derivatives, is considerably larger, exceeding USD 40 trillion.
The expansion has transformed hedge funds from relatively specialised investment vehicles into major participants in trading, liquidity provision, and risk transfer.
The IMF said their activity can improve market efficiency and price discovery during normal conditions but warned that the same characteristics that make the funds useful can magnify instability when markets come under pressure.
The central concern is leverage.
Hedge funds have expanded their positions partly through borrowing and derivatives, allowing them to control assets worth considerably more than the capital invested by their clients. This can generate higher returns when trades work, but it can also force rapid deleveraging when prices move sharply against them.
That risk is particularly significant in government bond markets. Hedge funds have substantially increased their presence in US Treasuries, with their share of the market rising from about 4% in 2022 to 9% in 2025, according to the IMF.
One important source of this growth is the so-called cash-futures basis trade.
Hedge funds buy Treasury securities while taking offsetting positions in Treasury futures, seeking to profit from relatively small price differences between the two markets.
Because the expected return from such trades is small, funds often employ significant leverage to make the strategy profitable at scale.
The strategy can provide useful liquidity by connecting the cash and derivatives markets. But it also creates a vulnerability if funding costs rise or market prices move sharply.
A fund facing margin calls may have little choice but to sell assets quickly, potentially pushing prices lower and triggering further losses elsewhere.
The US Office of Financial Research has highlighted the same development. Hedge funds’ cash Treasury holdings reached about USD 2 trillion at the end of 2025, nearly three times their level five years earlier.
Their share of marketable Treasury debt had reached a record 7%.
The IMF has previously warned about the consequences of such leveraged positions. During the market turmoil of early 2020, hedge funds unwound an estimated $172 billion of Treasury positions, contributing to a sharp deterioration in market functioning and prompting the Federal Reserve to intervene with large-scale Treasury purchases.
The concern is that the financial system has become even more interconnected since then.
Hedge funds rely heavily on banks and securities dealers for financing, derivatives, and other services. The IMF said the five largest prime brokers serve roughly two-thirds of hedge fund clients, creating channels through which losses at funds can spread to the banking system.
The concentration of the industry is another issue. Funds domiciled in just four jurisdictions—the US, the Cayman Islands, Luxembourg, and Ireland—control more than 80% of hedge fund assets. The IMF said the largest funds also account for a growing share of overall exposures.
That makes monitoring difficult because regulators do not necessarily have a complete picture of positions across jurisdictions and asset classes.
Opacity is therefore a major part of the IMF’s concern. Unlike banks, hedge funds generally operate with fewer disclosure requirements, while derivatives can create large exposures that are not immediately apparent from balance sheets.
The IMF is calling for policymakers to improve data collection and monitoring so authorities can better identify concentrations of leverage and interconnectedness before a market shock occurs.
The issue extends beyond Treasuries. Hedge funds are active across equities, credit, currencies, commodities, and derivatives, meaning a disorderly unwinding in one market can spill into others. Their ability to move quickly can be beneficial when markets are functioning normally but potentially destabilizing when many funds respond to the same signal at the same time.
That risk has become more relevant as global markets face a combination of elevated asset valuations, geopolitical uncertainty, changing interest-rate expectations, and heavy government borrowing.
The IMF’s warning does not amount to a call for hedge funds to be treated like banks. Instead, it reflects a broader shift in financial-stability thinking: regulators increasingly need to look beyond traditional banks to understand where leverage and market-making risks are accumulating.
Non-bank financial institutions now play a much larger role in the global financial system. The IMF has previously warned that leverage among non-banks, including hedge funds and leveraged exchange-traded funds, can exacerbate volatility through forced selling and liquidity strains.
Policymakers face the challenge of finding a balance. Excessive regulation could reduce the liquidity and price-discovery functions that hedge funds provide, while insufficient oversight could leave authorities discovering the scale of vulnerabilities only after a crisis has begun.
For investors, the IMF’s message is equally significant. A hedge fund’s apparent exposure to an asset may tell only part of the story. Financing arrangements, derivatives, collateral requirements, and positions held through different counterparties can materially alter the risks.
As hedge funds continue to expand their footprint, the IMF’s argument is that their importance can no longer be judged simply by assets under management. The real question is how much leverage they control, where that leverage sits, and what happens when markets move sharply in the opposite direction.
With USD 13 trillion in gross assets and more than USD 40 trillion in notional exposure, the answer is becoming increasingly important for the stability of the global financial system.