IMF update

Dear MARIA, We just published a new blog—read the full text below. Hedge Funds Improve Market Functioning, but Can Also Amplify Stress (Credit: BalkansCat/iStock by Getty Images)  By Andrea Deghi, Taneli Makinen, Mahvash S. Qureshi, Felix Suntheim  Hedge funds have become increasingly important participants in financial markets, even though they still represent a relatively small share of the nonbank financial sector. Since 2013, gross assets under management have tripled, to $13 trillion, while gross notional exposures, which include on- and off-balance-sheet positions, are about $40 trillion. Their presence is especially notable in sovereign bond markets, where they held about 9 percent of US Treasurys in 2025.   Unlike most other financial intermediaries, hedge funds invest and borrow with relatively few constraints. This flexibility allows them to invest in illiquid assets, make extensive use of leverage, and adjust positions rapidly. This supports liquidity, price discovery, and risk sharing in normal times. But these features can also transmit and amplify shocks when markets deteriorate, as we show in an analytical chapter of the latest Global Financial Stability Report.  Whether hedge funds support markets or worsen stress depends on the vulnerabilities that can manifest in their balance sheets—notably, leverage, crowded positions, and redemption pressures.    Leverage can force hedge funds to retrench precisely when markets are least able to absorb asset sales. Many hedge fund strategies rely on borrowed funding, including short-term financing against securities through repurchase agreements, prime broker credit, and derivatives. When volatility rises or financing conditions tighten, hedge funds may face margin calls, requiring them to reduce exposures or unwind positions. In these circumstances, hedge funds can shift from acting as liquidity providers to amplifiers of market stress.   These dynamics may be reinforced when many hedge funds hold similar positions, known as crowded trades, and have investors who are quick to pull money after losses. In such cases, losses can trigger synchronized unwinds across hedge funds that exacerbate asset price declines, while investor withdrawals may force additional asset sales, creating self-reinforcing feedback loops between losses, deleveraging, and withdrawals.   Our analysis shows that these vulnerabilities materially worsen market outcomes during periods of stress, as measured by spikes in the CBOE Volatility Index, or VIX. Stocks most widely held by hedge funds are 10 percentage points more volatile and suffer 4 percentage points deeper peak-to-trough losses than the least crowded stocks. Volatility and losses are also greater when the hedge funds holding these stocks experience simultaneous investor redemptions. These effects are amplified by leverage, underscoring how the combination of borrowing, crowded positions, and correlated investor withdrawals can magnify the transmission of shocks through financial markets. Leverage also plays an important role in key funding markets such as the US Treasury market. In calm times, hedge funds use borrowed money in so-called basis trades, seeking to profit from small price differences between Treasury securities and related derivatives. These trades help align prices and support market liquidity. But when funding becomes more expensive, hedge funds may be forced to unwind positions quickly, straining market liquidity and worsening market dislocations.   Stress transmission   As hedge funds have become more active across financial markets, shocks to the sector can quickly spread. An important channel runs through prime brokers, typically large dealer banks that provide financing and trading services to hedge funds. Losses at hedge funds can weigh on these banks and may reduce their capacity to lend when markets are already under pressure.   Hedge fund stress can also spill across borders. When the VIX rises and global risk sentiment deteriorates, stock markets with a larger hedge fund presence tend to suffer larger declines. This is especially true in less liquid markets, where there may be fewer buyers available to absorb sales as hedge funds reduce positions. Strengthening resilience   Safeguarding financial stability requires policy frameworks that identify where vulnerabilities are concentrated and how they could interact under stress. Many authorities still lack important information, particularly on leverage, derivatives exposures, prime broker relationships, and cross-border activities. Better reporting and information sharing are therefore central to effective surveillance.   Policy measures should be calibrated to the source of risk. Where vulnerabilities arise from synchronized deleveraging across many funds, measures that apply across markets, such as minimum margins and haircuts, and stronger collateral management can help. Where risks are concentrated, such as in specific firms or exposures, entity- and concentration-based measures, including risk-based leverage limits, margin or capital add-ons, and large-exposure limits, may be warranted.    Supervisors should ensure that prime brokers maintain strong counterparty risk management and monitor exposures to highly leveraged hedge funds. System-wide stress tests can show how hedge funds and their counterparties would respond to shocks, and how pressures could propagate across financial institutions and markets. Identifying such vulnerabilities early can help prevent them from becoming systemic risks.   —This blog is based on Chapter 2 of the October 2026 Global Financial Stability Report, “Hedge Funds and Financial Stability.”  Read the blog Recent blogs Targeted Support, Not Subsidies, Can Best Protect People When Inflation Surges More directed support helps vulnerable families at a fraction of the cost of broad subsidies while helping to preserve scarce fiscal resources Policies to Curb Tax Avoidance Are Changing How Countries Court Global Business Profits and investment appear to be aligning more closely as the international taxation landscape evolves How Countries Are Adapting as the Global Energy Shock Persists Governments deployed a wide range of measures as the energy shock unfolded, reflecting different domestic economic conditions. Targeting remains essential. Thank you again for your interest in the IMF Blog. Please write to us directly and let us know your thoughts. We would love to hear from you.   Jeff Kearns  Managing Editor | IMF Blog  jkearns@IMF.org

Dear MARIA, We just published a new blog—read the full text below. Targeted Support, Not Subsidies, Can Best Protect People When Inflation Surges (Credit: Arnun Chonmahatrakool/IMF Photo)  By Braulio Britos, Chiara Maggi, Galip Kemal Ozhan, Sihwan Yang The cost of everyday essentials, from groceries and electricity to fuel, has risen sharply over the past five years. That’s largely because of disruptions to global commodity markets from the start of Russia's invasion of Ukraine in 2022 through to this year’s conflict in the Middle East.   During these cost-of-living crises, the prices of necessities such as food and energy surge, outpacing other prices and wage growth. Because it is hard for people to cut back on the basics, or replace them altogether, even temporary spikes in their prices can impose significant hardship.   The consequences extend far beyond a few months of higher inflation.   These crises can threaten macroeconomic stability, as we show in an analytical chapter of the latest World Economic Outlook. We find that the prices of necessities relative to other goods continue rising for more than a year after the start of a typical episode, and remain persistently elevated. As a result, people face not only a temporary spike in food and energy costs, but a lasting deterioration in the affordability of essentials relative to other items.    In addition, inflation remains elevated long after the initial surge in food and energy prices. Inflation expectations also rise and stay above pre-crisis levels for years, suggesting that these episodes may complicate efforts by central banks to control inflation. At the same time, purchasing power erodes as real wages fall and remain below prior levels for an extended period.   These burdens also fall disproportionately on poorer families. Because food and energy account for a larger share of spending by lower-income families, they endure significantly higher inflation than wealthier households during cost-of-living crises.  The effects on inequality and poverty are substantial, particularly in lower-income countries, where basics account for an even larger share of spending by poor households.   This underscores why cost-of-living crises are economic shocks that can simultaneously undermine price stability, reduce living standards, and widen inequality.   How governments intervene   Facing demands for immediate government action, governments have relied heavily on broad-based interventions to suppress price gains during past episodes, according to new data from 76 countries over the past three decades. This is particularly true in emerging market economies and low-income countries.  In advanced economies, such price-suppressing interventions mostly took the form of reductions in value-added or excise taxes on food and energy products, which limit price increases for final consumers. By contrast, emerging markets and low-income countries have relied more heavily on policies that address cost pressures upstream in the supply chains, such as producer subsidies, reductions in customs duties, or outright price controls, likely reflecting the greater prevalence of informal retail markets.    Governments have also provided direct income support. While advanced economies have relied somewhat on targeted transfers, poorer countries have more frequently introduced broad-based increases in wages and pensions.    While these interventions may provide immediate relief, they vary widely in how effectively they protect vulnerable households and the burden they place on public finances.    Subsidies are costly   Targeted and temporary transfers are the most effective and cost-efficient way to protect poorer households when prices for basics spike. This approach directly supports those who need it most, preserves scarce fiscal space, and allows high market prices to continue signaling scarcity, encouraging consumers to reduce consumption if they can.   Price-suppressing measures are far less efficient. They can ease monetary policy trade-offs in the short term by containing inflation and preventing inflation expectations from becoming unmoored. But they also come at significantly higher fiscal costs. Delivering the same protection to lower-income familiesthrough consumer subsidies can require three to six times more fiscal resources than targeted transfers. Subsidizing producers can cost 14 to 22 times more than targeted income support, according to evidence from a novel model framework. This occurs because much of the support fails to reach those that need it most, as Europe’s 2022-23 energy crisis illustrates. For every euro spent suppressing electricity, natural gas, and gasoline prices, less than 20 cents reached the poorest fifth of households.    These policies also generate broader inefficiencies. By keeping prices artificially low, they weaken incentives to conserve scarce resources. This can further drive up global prices when many countries implement them simultaneously, in turn worsening policy trade-offs for lower-income countries.    Producer subsidies are even less efficient. Because they lower production costs rather than directly supporting households, foreign consumers benefit through lower export prices of downstream products. As a result, taxpayers pay more to benefit people and businesses in other countries rather than vulnerable families at home.    Policy design and sequencing    Cost-of-living crises impose substantial economic and social costs, with particularly large welfare losses for lower-income families. Assistance, when warranted, should be temporary and delivered through targeted income-support measures, ideally using existing social protection systems that can be scaled up quickly.   In exceptional circumstances, such as acute food-security concerns, heightened risks of social unrest, or severe implementation constraints, support may need to extend beyond the poorest households and rely on broader tools, where fiscal space permits.     Even then, support should be calibrated to the temporary component of a particular price increase, with clear sunset clauses, rather than to permanently higher prices. Moreover, when expanding the pool of beneficiaries, the generosity of assistance should remain anchored to the average impact of the shock on lower-income households. When price measures are unavoidable, they should be narrowly focused on the goods and services consumed disproportionately by vulnerable households, preferably in downstream sectors, and designed to preserve as much of the underlying price signals as possible.   In a more shock-prone world, strengthening social protection before crises occur can improve the effectiveness of future policy responses and help preserve the fiscal space needed to address future shocks.    —This blog is based on Chapter 2 of the October 2026 World Economic Outlook, “Navigating a Shock-Prone World: Lessons from Cost-of-Living Crises.” Chapter authors are Marijn A. Bolhuis, Braulio Britos, Bertrand Gruss (co-lead), Chiara Maggi (co-lead), Galip Kemal Ozhan and Sihwan Yang, with support from Maryam Abdou, Owen Russell Desberg, Riya Varghese and Yarou Xu. Adeleke Hakeem Adeyemi provided technical and computational assistance. Read the blog Recent blogs Policies to Curb Tax Avoidance Are Changing How Countries Court Global Business Profits and investment appear to be aligning more closely as the international taxation landscape evolves How Countries Are Adapting as the Global Energy Shock Persists Governments deployed a wide range of measures as the energy shock unfolded, reflecting different domestic economic conditions. Targeting remains essential. What Governments Should Do When Food Prices Surge The right choice between subsidies, vouchers, or in-kind distribution can help countries save precious resources Thank you again for your interest in the IMF Blog. Please write to us directly and let us know your thoughts. We would love to hear from you.   Jeff Kearns  Managing Editor | IMF Blog  jkearns@IMF.org Stay connected with the International Monetary Fund:       This email was sent to politikimx@gmail.com on behalf of: International Monetary Fund 1900 Pennsylvania Ave NW · Washington, DC · 20431