Moody's Warns Hedge Fund Race for Individual Investors May Increase Systemic Risk

Moody's, the international credit rating agency, has warned that the recent competition among hedge funds on Wall Street to secure funds from individual investors could place a burden on the entire financial system.

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According to the Wall Street Journal (WSJ) on June 10 (local time), Moody's pointed out in a recent report that private equity fund managers raising capital from individual investor clients could introduce new risks to the financial markets.

In the report, Moody's stated, "If the growth of (the funds) outpaces the industry's ability to manage complexity, it could result in consequences that impact systemic risk." The agency also expressed concern that "as private asset managers increase their market share, they may face the risk of reputational damage if they loosen credit standards or fail in risk management."

This warning comes as private equity fund managers, facing a decline in capital inflows from traditional institutional investors such as pension funds and university endowments, are turning their attention to individual investors?a move that could potentially backfire.

According to data compiled by financial information providers Preqin and Moody's, private equity fund inflows reached $1.8486 trillion in 2021, but have since declined for three consecutive years, dropping to $1.1715 trillion last year.

Investments in alternative assets such as private lending have traditionally been considered the domain of institutional investors or high-net-worth individuals, due to their low liquidity and the difficulty of valuation. However, recently on Wall Street, there is a trend in which exchange-traded fund (ETF) and mutual fund managers are partnering with hedge fund managers to open up alternative asset investment opportunities to individual investors.

State Street, a major U.S. asset manager, has launched a series of alternative asset ETFs in collaboration with Apollo Global Management, a large hedge fund known for private lending investments. Other major managers, including BlackRock and Capital Group, are also forming partnerships with hedge funds to promote the sale of alternative investment products to individual investors.