A report from hedge fund ADAPT Investment Managers argues that global financial markets have become structurally more fragile over the past five years, with liquidity conditions increasingly vulnerable to shocks as speculative actors gain influence across the financial system.
In the paper, Risk Actually, ADAPT IM says the modern market ecosystem has shifted decisively away from long-term “stabilisers” such as banks, active managers and sovereign institutions toward what it describes as “fragilisers” — participants whose liquidity provision is conditional, highly procyclical and likely to disappear during periods of stress.
The report identifies seven major structural trends reshaping markets: the rise of private assets, passive investing, multi-strategy hedge funds, non-bank liquidity providers, retail trading, shrinking sovereign “dry powder” and rising leverage. ADAPT argues each trend independently weakens market resilience, while collectively creating a market structure that has never been tested through a prolonged financial crisis.
Private assets and opacity concerns
The report highlights the explosive growth of private markets as one of the most significant changes in global finance. ADAPT argues investors have increasingly sacrificed liquidity in pursuit of yield and diversification, while simultaneously increasing hidden concentration risks.
The firm notes that private credit has expanded aggressively into riskier areas including consumer lending and buy-now-pay-later financing, while private market exposure remains heavily concentrated in technology-related assets. According to the report, many allocators now have duplicated exposure to the same economic themes across both public and private markets.
ADAPT also warns that opacity is increasing across the financial system as private assets receive less regulatory scrutiny and rely more heavily on model-based valuations. The report points to the growing role of privately rated securities and concerns from regulators that policymakers could struggle to assess systemic risks during a downturn because of insufficient visibility into non-bank financial institutions.
Passive investing and concentration risks
The report argues that passive investing has fundamentally altered price formation in equity markets. As investors increasingly allocate capital to index-tracking vehicles, ADAPT says ownership decisions are becoming disconnected from company fundamentals.
This, the firm argues, has amplified concentration risk in a small number of mega-cap technology companies. Passive funds mechanically allocate more capital to larger stocks, reinforcing market leadership and weakening the stabilising role traditionally played by active managers who would otherwise rotate capital into undervalued sectors.
The report highlights concerns over the AI-related equity complex, arguing that low realised correlations between major technology companies may be masking substantial systemic risk. ADAPT warns that if correlations rise sharply during a downturn, market volatility could increase dramatically even if individual stock volatility remains stable.
Multi-strategy hedge funds and crowded positioning
ADAPT examines the rise of large multi-strategy hedge fund platforms, which it argues have become increasingly systemically important. Multi-strategy firms now account for roughly one-third of hedge fund gross market value deployed in US equities and represent 37% of average daily trading volumes, according to the report.
While the paper acknowledges that these firms have developed highly sophisticated risk management frameworks, it argues that the standardisation of risk models across platforms could create dangerous crowding dynamics.
The report warns that many portfolio managers across the industry are increasingly operating under similar constraints, utility functions and risk frameworks. During periods of stress, this could lead to simultaneous deleveraging and forced liquidations across multiple firms.
ADAPT also points to rising correlations between hedge fund returns and broader equity markets. According to BNP Paribas data cited in the report, the correlation between multi-strategy hedge funds and equities rose to 88% in 2025, compared with 28% over the 2021-2025 period.
Non-bank liquidity providers dominate markets
The report argues that traditional bank market-making has increasingly been replaced by “non-committed liquidity providers” such as quantitative firms, market makers and proprietary trading firms. Unlike banks, which historically maintained client relationships and broader economic responsibilities, ADAPT says these newer participants are primarily focused on short-term profitability and can withdraw liquidity rapidly during volatile periods.
The firm highlights the growing dominance of firms such as Jane Street and Citadel Securities, alongside the rapid expansion of quantitative trading strategies. While these participants create the appearance of deep liquidity during stable periods, ADAPT argues that much of this liquidity is conditional and could disappear during market stress.
The report also raises concerns about the growing interconnectedness between banks and non-bank financial institutions through prime brokerage and financing relationships, warning that stress among hedge funds or market makers could quickly spread into the traditional banking system.
Rising leverage and systemic vulnerability
ADAPT concludes that leverage across the financial system is approaching dangerous levels. The report highlights the rapid growth of derivatives trading, leveraged ETFs, structured products and increasingly complex financing structures tied to AI infrastructure projects.
The firm argues that markets are increasingly dominated by speculative behaviour rather than fundamental investing, with liquidity conditions becoming more fragile as leverage builds.
ADAPT concludes that today’s market structure is “completely new and untested” and warns that investors relying on historical relationships and back-tested models may be underestimating the scale of future risks.