Liquidity and leverage risks in Britain’s £1.8tn alternative investment fund market are concentrated in particular fund types rather than spread evenly across the industry, new Financial Conduct Authority research has found.
The regulator has used reporting data to construct its first market-wide analysis of UK alternative investment funds, examining more than 11,000 funds and tracking the development of the sector over several years.
The FCA said the value of alternative funds managed in the UK reached £1.8tn in 2025, with private credit among the fastest-growing areas of the market.
Professional investors remain central to the sector, while specialist managers operate alongside a relatively small group of very large asset-management businesses. The regulator’s analysis focuses on areas where rapid growth, leverage, and limited liquidity could create vulnerabilities.
Real estate funds are one area of particular attention. Reuters reported from the FCA research that around 10% of real estate fund net asset value could be redeemed within 30 days, while an estimated 7% of the underlying assets could be liquidated over the same period.
Property cannot normally be sold as quickly as investors can submit redemption requests. When outflows rise sharply, managers can be forced to hold larger cash buffers, delay withdrawals, sell assets under pressure, or use other liquidity-management tools.
The UK has encountered that mismatch before. Property funds faced significant redemption pressure after the 2016 Brexit referendum and again during the disruption surrounding the pandemic, reinforcing regulatory concern over open-ended funds offering frequent withdrawals while holding inherently illiquid assets.
The FCA’s research extends beyond property. It identified leverage as concentrated among particular categories of alternative funds, including hedge funds, private equity, and private credit, rather than finding a system-wide leverage problem.
Private credit has become a more prominent supervisory issue as institutional investors commit greater capital to loans made outside traditional bank balance sheets. Reuters reported that private-credit assets covered by the FCA analysis more than doubled from 2021 to £335bn in 2025, with a subset of funds remaining persistently highly leveraged.
The growth of private markets has been supported partly by investor demand for assets with different return characteristics from listed equities and bonds. Companies have also increasingly used private credit as an alternative source of financing where bank lending or public debt markets are less suitable.
More credit intermediation outside the banking system changes the channels through which financial stress can spread. Regulators need to understand how leverage, refinancing pressure, investor withdrawals, and asset valuations could interact during difficult markets, particularly when less liquid assets sit behind redemption structures that allow capital to leave relatively quickly.
The research is informing the FCA’s proposed reform of the UK Alternative Investment Fund Managers regime. The regulator is consulting on a framework intended to make requirements more proportionate to managers’ size and activities while maintaining safeguards around market integrity and investor protection.
Its proposals would replace elements of the retained EU-derived AIFMD framework with a three-tier structure for small, medium, and large managers. The FCA has argued that parts of the current rulebook are dated and fail to distinguish adequately between businesses trading liquid financial instruments and those managing long-term illiquid assets.
The new analysis gives that reform programme a stronger empirical base. A more proportionate regime depends on identifying where risks are concentrated rather than applying identical requirements across fundamentally different investment strategies.
The findings do not point to a general liquidity shortfall across Britain’s alternative-fund sector. They instead identify specific areas where fund structures, leverage, and asset liquidity warrant closer supervision as private-market assets continue to expand.
Those concentrations will shape the next stage of regulatory reform. The FCA is seeking to simplify a substantial part of the rulebook while retaining closer oversight of the areas where liquidity and leverage can create the greatest market stress.
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