FERI: High leverage top industry risk as market narrows

FERI warned that high leverage is the primary risk facing the investment industry as recent market gains have concentrated in a small group of stocks, increasing the potential for sharp volatility if sentiment shifts. Marcus Storr, Head of Alternatives at FERI, described the firm’s response to those risks.

FERI favors specialised long/short equity managers rather than broad global equity funds. Storr explained that focused long/short books allow the firm to measure and control risk more precisely. He added that emerging market long/short managers have delivered strong results in recent years, supporting FERI’s allocation choices.

The firm begins investment selection by assessing each client’s risk appetite. Storr contrasted family offices with institutional investors, noting family offices often face fewer regulatory limits, have longer investment horizons and can accept different liquidity profiles. Institutional clients generally operate within stricter, rule-based frameworks. Those differences influence which strategies the firm recommends or avoids for each client.

Liquidity is a central constraint for FERI’s clients. Storr said the majority of the firm’s portfolio positions can be redeemed quarterly and that FERI rejects investments that create what it calls a “structural mismatch” between manager terms and the liquidity of underlying assets. The firm avoids illiquid investments that lock capital in ways that conflict with client redemption expectations.

Leverage is the main concern highlighted by Storr. He described leverage levels in parts of the industry as unsustainable and warned that higher leverage amplifies market moves. He also pointed to pass-through fee structures that pass operating costs to investors and can create pressure to use more leverage to reach targeted returns. “We are actively avoiding highly leveraged strategies,” Storr said.

Storr linked the leverage issue to market concentration, saying much of the recent bull market’s gains have been driven by a narrow set of stocks. He warned that if markets turn volatile, leverage can quickly magnify losses across strategies and asset classes.

For context, long/short equity managers take both long positions in stocks they expect to rise and short positions in stocks they expect to fall. That approach can separate stock selection returns from broad market moves and allows for more targeted hedging. FERI emphasizes aligning manager liquidity terms with investor redemption terms to reduce the risk of forced selling during market stress.

Storr said FERI’s stance reflects a view that market regimes can change frequently and that avoiding concentrated bets and high leverage is part of how the firm seeks to manage client exposure to large losses.