BoI claims mutual hedge funds threaten financial stability

A stormy session of the Knesset Finance committee took place this week on the regulation of mutual hedge funds, an investment product that has been offered to the public since April 2023. In the course of the discussion, the Bank of Israel claimed that there were fears for the financial stability of the funds, a claim that drew complaints from senior capital market figures who attended the session.

Mutual hedge funds are the fruit of an initiative by the Israel Securities Authority. They enable the general public to invest in mutual funds that operate with strategies similar to those of traditional hedge funds, a sophisticated product hitherto available only to the very wealthy and to financial institutions. Two and a half years after being launched, the funds are growing rapidly, and now manage close to NIS 4 billion. The sector is however having to deal with a regulatory threat that is delaying the launch of dozens of new funds and even threatens the existing ones, because of a delay in legislation in the Knesset to regulate their activity.

The mutual hedge funds were set up under a provisional order with the aim of enabling the public to have exposure to advanced investment strategies. Last September, the Israel Securities Authority extended the order to April 2027, giving the managers of the existing funds some breathing room. Dozens of new funds that have filed prospectuses are however stuck in the pipeline, as the Securities Authority is freezing approval of them until legislation is passed.

In the Knesset Finance Committee hearing, Dr. Yossi Saadon, director of the finance section in the Bank of Israel Research Department, said, “We see that the risk in this field could be high and reach the level of a threat to financial stability. For example, a fund that invests in loans that are not sufficiently controlled such that the fund manager does not correctly gauge the risk and leverages these loans by means of credit that he takes from other sources.”

The Bank of Israel thus signaled that it is concerned at the rapid growth of the mutual hedge funds, and that there should be no rush to approve new funds. The central bank’s main argument is the fear of high leverage and lack of transparency in the management of money in the sector.

Adv. Nimrod Sapir, CEO of the Israel Investment Houses Association, expressed annoyance at Saadon’s remarks. “I am surprised that the Bank of Israel chose to use the doomsday weapon and claim that there is a fear for financial stability with regard to a niche market that manages NIS 4 billion, out of a mutual funds industry that manages NIS 800 billion,” he said. “When this argument is wheeled out on such an esoteric subject, when it is clear that there is no danger to the stability of the system, how should we treat warnings from the Bank of Israel of a fear for stability next time?”

Mutual hedge funds approach NIS 4b

Zvi Stepak, one of the founders of investment house Meitav and a senior figure in the mutual funds industry, reacted with dismay to the remarks of the Bank of Israel representative at the session. “I have to say that I was simply shocked when I heard the Bank of Israel’s arguments,” Stepak said. “From what has been said here it emerges that the Bank of Israel is all of a sudden regulating the Israel Securities Authority. Perhaps it should be the other way around? After all, the Trade Bank affair didn’t happen under the Securities Authority but under the Bank of Israel, if we are already talking about financial stability,” Stepak added, referring to the biggest bank fraud in Israel’s history.

The aim of the mutual hedge funds traded on the Tel Aviv Stock Exchange is to achieve positive returns both when the market rises and when it falls, and to beat the returns on the main market indices. This is under the supervision of the Israel Securities Authority, and with the advantages of regular mutual funds, without the investors having to be “qualified investors” as required for traditional edge funds.

The minimum investment in the mutual hedge funds is only a few hundred shekels. They can be bought through a trading account at a bank or investment house, and they are relatively liquid, with monthly exit points, which compares with quarterly exit points in traditional funds. Another advantage is in their tax treatment, as tax is payable on gains only on sale, and not annually.

The need for a discussion in the Knesset finance Committee arose from the fact that the Israel Securities Authority regularized the activity of the mutual hedge funds through a provisional order approved by the Knesset, assuming that legislation would be completed within a reasonable time, and indeed a government bill on the matter was submitted to the Finance Committee two years ago.

The outbreak of the Swords of Iron war, however, shunted the matter aside in favor of more urgent issues. In May last year the subject again arose in the Finance Committee, but then the campaign against Iran began and the legislation made no progress in the summer session of the Knesset. In October last year, the validity of the provisional order expired. After an extension by the Securities Authority, the final expiry date for the order was set as April 2027, after which the activity of the mutual hedge funds can only be extended through legislation.

Published by Globes, Israel business news – en.globes.co.il – on January 20, 2026.

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