FERI: Excess leverage is industry’s top risk

Marcus Storr, head of alternatives at FERI, warned excess leverage is the industry’s top risk as recent market gains have concentrated in a small group of stocks. FERI is avoiding highly leveraged strategies and increasing allocations to specialised long/short equity managers.

He noted recent months of volatility have sharpened the firm’s focus on risk control, liquidity and targeted equity exposure. The firm has reduced exposure to broad global equity funds to measure and manage risk more precisely and prefers long/short managers, especially in emerging markets, where returns have been strong recently.

Allocation decisions start with each client’s risk appetite. Family offices generally face fewer regulatory limits, have longer investment horizons and more flexibility to manage risk. Institutional investors operate under stricter, rule-based frameworks. Those differences shape the types of strategies FERI places with each client.

Liquidity is a central consideration. FERI monitors mismatches between a manager’s liquidity terms and the liquidity of underlying investments. The firm says the majority of its portfolio can be redeemed quarterly and avoids investments that create ‘a structural mismatch that we find unacceptable.’ Clients value the ability to access capital on regular terms.

Storr described leverage as a two-fold problem and highlighted fee structures and platform costs. ‘Investors are ultimately bearing much of the costs through pass-through fee structures; they are not only paying management fees but also the operating costs of the platform itself,’ he said. Storr added that many platforms require high levels of leverage and that FERI is actively avoiding highly leveraged strategies.

He cautioned that when market gains are concentrated in a narrow set of stocks, a correction could trigger sharp volatility and that excessive leverage can amplify market stress. FERI’s stated approach is to limit exposure to highly leveraged strategies, match liquidity to client needs and allocate to specialised managers where downside risk can be managed more precisely.