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Hedge funds and asset managers have turned bearish on the US dollar for the first time since Donald Trump’s election victory last year, marking a significant shift in market sentiment, according to report by Business Times.

The report cites data from the Commodity Futures Trading Commission (CFTC) as showing that speculative traders held $932m in net short positions on the dollar as of 18 March – an abrupt reversal from mid-January, when they had amassed $34bn in long-dollar bets.

The shift reflects growing concerns over the impact of Trump’s economic policies, Federal Reserve rate expectations, and broader uncertainty surrounding the US economy. Market confidence in a stronger dollar at the start of 2025 has given way to apprehension over potential trade wars, public sector job cuts, and restrictive immigration policies.

At the start of the year, many hedge funds and investment strategists had forecast a strong dollar, expecting Trump’s policies and a limited number of Federal Reserve rate cuts to support the currency. However, growing concerns about economic fragility have reinforced expectations for at least three Fed rate reductions by early 2026. While the Bloomberg Dollar Spot Index saw a slight uptick last week, it remains on track for its worst monthly performance since late 2023.

Deutsche Bank strategists noted in a 19 March report that Trump’s trade policies, once viewed as a bullish catalyst for the dollar, are losing their perceived strength. Meanwhile, Credit Agricole revised its dollar forecast downward, citing the underestimation of how a US-led global trade war, public sector layoffs, and immigration restrictions would weigh on growth.

Hedge funds and asset managers have turned bearish on the US dollar for the first time since Donald Trump’s election victory last year, marking a significant shift in market sentiment, according to report by Business Times.

The report cites data from the Commodity Futures Trading Commission (CFTC) as showing that speculative traders held $932m in net short positions on the dollar as of 18 March – an abrupt reversal from mid-January, when they had amassed $34bn in long-dollar bets.

The shift reflects growing concerns over the impact of Trump’s economic policies, Federal Reserve rate expectations, and broader uncertainty surrounding the US economy. Market confidence in a stronger dollar at the start of 2025 has given way to apprehension over potential trade wars, public sector job cuts, and restrictive immigration policies.

At the start of the year, many hedge funds and investment strategists had forecast a strong dollar, expecting Trump’s policies and a limited number of Federal Reserve rate cuts to support the currency. However, growing concerns about economic fragility have reinforced expectations for at least three Fed rate reductions by early 2026. While the Bloomberg Dollar Spot Index saw a slight uptick last week, it remains on track for its worst monthly performance since late 2023.

Deutsche Bank strategists noted in a 19 March report that Trump’s trade policies, once viewed as a bullish catalyst for the dollar, are losing their perceived strength. Meanwhile, Credit Agricole revised its dollar forecast downward, citing the underestimation of how a US-led global trade war, public sector layoffs, and immigration restrictions would weigh on growth.

Hedge funds Balyasny Asset Management and Citadel have poached equity portfolio managers from each other, intensifying the battle for top trading talent as bonus season concludes and professionals seek new opportunities, according to a report by Reuters.

The report cites unnamed sources familiar with the matter as revealing that Balyasny has recruited David Brodsky, a healthcare-focused equity Portfolio Manager from Citadel’s Surveyor Capital unit. Brodsky, who has over two decades of experience, will join Balyasny in 2027 after serving a non-compete period.

Citadel has also hired Jeremy Simon, a former Balyasny Portfolio Manager who was part of its Anthem program, which grooms top-performing senior analysts for portfolio manager roles. Simon, who had been with Balyasny since January 2024, will join Citadel’s Ashler Capital division in 2026, focusing on technology, media, and telecommunications investments.

Moving in the opposite direction, biotech investor Isai Peimer, previously at Citadel’s Surveyor Capital, has already started as a Portfolio Manager at Balyasny following a year-long non-compete agreement.

Hedge funds Balyasny Asset Management and Citadel have poached equity portfolio managers from each other, intensifying the battle for top trading talent as bonus season concludes and professionals seek new opportunities, according to a report by Reuters.

The report cites unnamed sources familiar with the matter as revealing that Balyasny has recruited David Brodsky, a healthcare-focused equity Portfolio Manager from Citadel’s Surveyor Capital unit. Brodsky, who has over two decades of experience, will join Balyasny in 2027 after serving a non-compete period.

Citadel has also hired Jeremy Simon, a former Balyasny Portfolio Manager who was part of its Anthem program, which grooms top-performing senior analysts for portfolio manager roles. Simon, who had been with Balyasny since January 2024, will join Citadel’s Ashler Capital division in 2026, focusing on technology, media, and telecommunications investments.

Moving in the opposite direction, biotech investor Isai Peimer, previously at Citadel’s Surveyor Capital, has already started as a Portfolio Manager at Balyasny following a year-long non-compete agreement.

Hedge funds have ramped up bearish bets on US stocks at the fastest pace since 2020, reinforcing expectations of further market declines, according to a report by Reuters citing a client note from the prime brokerage division at Goldman Sachs.

Rather than pulling back entirely though, hedge funds increased short positions more aggressively than long ones in March, as the S&P 500 dropped nearly 5%. In contrast, global stocks excluding the US are on track for their strongest first-quarter performance since 2019, rising 8% so far.

Hedge funds executed their fastest equity sell-off in four years during the first week of March, dumping stocks over a 48-hour window as the S&P 500 fell 3.1%, marking its worst weekly performance in six months.

The Federal Reserve’s downward revision of US economic growth and increased inflation projections, coupled with uncertainty surrounding President Donald Trump’s trade tariffs, have further pressured market sentiment.

Hedge funds have notably cut exposure to tech and media stocks, bringing allocations to a five-year low. Some funds have initiated short positions on AI-related companies, while tech-focused hedge funds have posted negative 4.1% returns in March. Meanwhile, healthcare-focused funds are down 1.5%, according to Goldman Sachs.

The bearish stance on US equities is not mirrored in European and Asian markets, where hedge funds have exited losing trades without re-entering.

Despite broader market volatility, systematic hedge funds –which use algorithmic and quantitative strategies – have thrived, posting 8.9% gains year-to-date.

Meanwhile, global stock-picking funds have started to recover, gaining 1.5% in 2025 after suffering their worst two-week stretch since May 2022.

Hedge funds have ramped up bearish bets on US stocks at the fastest pace since 2020, reinforcing expectations of further market declines, according to a report by Reuters citing a client note from the prime brokerage division at Goldman Sachs.

Rather than pulling back entirely though, hedge funds increased short positions more aggressively than long ones in March, as the S&P 500 dropped nearly 5%. In contrast, global stocks excluding the US are on track for their strongest first-quarter performance since 2019, rising 8% so far.

Hedge funds executed their fastest equity sell-off in four years during the first week of March, dumping stocks over a 48-hour window as the S&P 500 fell 3.1%, marking its worst weekly performance in six months.

The Federal Reserve’s downward revision of US economic growth and increased inflation projections, coupled with uncertainty surrounding President Donald Trump’s trade tariffs, have further pressured market sentiment.

Hedge funds have notably cut exposure to tech and media stocks, bringing allocations to a five-year low. Some funds have initiated short positions on AI-related companies, while tech-focused hedge funds have posted negative 4.1% returns in March. Meanwhile, healthcare-focused funds are down 1.5%, according to Goldman Sachs.

The bearish stance on US equities is not mirrored in European and Asian markets, where hedge funds have exited losing trades without re-entering.

Despite broader market volatility, systematic hedge funds –which use algorithmic and quantitative strategies – have thrived, posting 8.9% gains year-to-date.

Meanwhile, global stock-picking funds have started to recover, gaining 1.5% in 2025 after suffering their worst two-week stretch since May 2022.

UK regulator the Financial Conduct Authority (FCA) has fined the London Metal Exchange (LME) £9.2m ($11.9) over its mishandling of the 2022 nickel crisis, marking the first-ever enforcement action against a UK exchange.

The ruling has reignited concerns within the hedge fund community about market transparency, risk controls, and regulatory oversight in commodity trading.

Hedge funds, including Elliott Associates, were among the hardest hit when the LME voided $12bn worth of trades on 8 March, 2022, following an unprecedented nickel price surge. The price of nickel soared past $100,000 per metric ton, doubling in just hours, forcing the exchange to cancel transactions and triggering lawsuits from financial firms claiming hundreds of millions in losses.

While the LME ultimately won the lawsuit, the case exposed significant shortcomings in market controls. Jennifer Han, Chief Legal Officer at the Managed Funds Association (MFA), warned that the lack of a robust regulatory response risks eroding investor confidence in UK markets.

For hedge funds specialising in commodity trading strategies, the FCA’s findings underscore systemic risks within the LME’s governance structure. The investigation found that only junior staff were monitoring trading during the early hours of 8 March, delaying escalation to senior management. Analysts say the absence of real-time oversight and poor market stress protocols exacerbated the crisis.

Despite the controversy, nickel trading volumes on the LME have rebounded to their highest levels since 2015, with many market participants resuming activity. However, concerns remain that hedge funds and other institutional investors could rethink their participation in LME markets if confidence in the exchange’s risk controls does not improve.

The LME has since implemented enhanced monitoring and risk protocols, acknowledging that over-the-counter (OTC) market activity played a significant role in the price spike.

UK regulator the Financial Conduct Authority (FCA) has fined the London Metal Exchange (LME) £9.2m ($11.9) over its mishandling of the 2022 nickel crisis, marking the first-ever enforcement action against a UK exchange.

The ruling has reignited concerns within the hedge fund community about market transparency, risk controls, and regulatory oversight in commodity trading.

Hedge funds, including Elliott Associates, were among the hardest hit when the LME voided $12bn worth of trades on 8 March, 2022, following an unprecedented nickel price surge. The price of nickel soared past $100,000 per metric ton, doubling in just hours, forcing the exchange to cancel transactions and triggering lawsuits from financial firms claiming hundreds of millions in losses.

While the LME ultimately won the lawsuit, the case exposed significant shortcomings in market controls. Jennifer Han, Chief Legal Officer at the Managed Funds Association (MFA), warned that the lack of a robust regulatory response risks eroding investor confidence in UK markets.

For hedge funds specialising in commodity trading strategies, the FCA’s findings underscore systemic risks within the LME’s governance structure. The investigation found that only junior staff were monitoring trading during the early hours of 8 March, delaying escalation to senior management. Analysts say the absence of real-time oversight and poor market stress protocols exacerbated the crisis.

Despite the controversy, nickel trading volumes on the LME have rebounded to their highest levels since 2015, with many market participants resuming activity. However, concerns remain that hedge funds and other institutional investors could rethink their participation in LME markets if confidence in the exchange’s risk controls does not improve.

The LME has since implemented enhanced monitoring and risk protocols, acknowledging that over-the-counter (OTC) market activity played a significant role in the price spike.

By Steve Novakovic, CAIA, CFA, Managing Director of Educational Programming, CAIA Association

 

In case you missed it, I recently published an article airing some of my grievances with benchmarking and performance analysis. As I warned in part 1, I’ve got a lot to say on the matter, so buckle up. 

Factor 3: “Peer”-group analysis

Jefferies Strategic Investments and Leucadia Asset Management Holdings have won a major legal victory against George Weiss, after a federal judge ruled that the hedge fund founder is personally liable for millions in unpaid debts tied to the collapse of Weiss Multi-Strategy Advisers, according to a report by Investment News.

Founded in 1978, Weiss Multi-Strategy Advisers was once one of the industry’s most respected firms, managing over $2bn in assets. However, a combination of lavish executive spending, declining performance, and mounting debts led to its dramatic shutdown in early 2024.

On 29 February, 2024, Weiss shocked his team in a Zoom call, instructing portfolio managers to liquidate all positions. Despite declining assets, executives allegedly continued flying on private jets and distributing six-figure bonuses, while Chief Investment Officer Jordi Visser faced criticism for focusing on his personal brand instead of stabilising operations.

The final blow came when Leucadia, a strategic partner of Jefferies, demanded repayment on outstanding loans. With no funds to meet its obligations, Weiss Multi-Strategy Advisers filed for Chapter 11 bankruptcy in April 2024, leaving creditors and employees – some owed millions in deferred compensation – scrambling.

Before the bankruptcy, Weiss signed a Forbearance Agreement in February 2024 with Jefferies and Leucadia, seeking to delay payments on $53m in debts tied to a 2018 Strategic Relationship Agreement (SRA) and two Note Purchase Agreements (NPAs).

Crucially, Weiss signed the agreement both personally and on behalf of the firm, with provisions explicitly binding him. Judge Alvin K Hellerstein of the US District Court for the Southern District of New York ruled firmly in favour of Jefferies and Leucadia, granting summary judgment against Weiss.

Weiss attempted several legal defences, arguing duress, lack of consideration, and lack of mutual assent, all of which were rejected. His claims that he signed the agreement under coercion, citing threats of lawsuits and reputational damage, were dismissed as insufficient to establish economic duress, especially given his status as a seasoned financial professional with legal representation.

The ruling strengthens Jefferies and Leucadia’s position in ongoing bankruptcy litigation, where Leucadia has accused Weiss of treating the hedge fund as a “personal piggy bank”, citing $28m in executive bonuses paid while the firm was insolvent.

Jefferies Strategic Investments and Leucadia Asset Management Holdings have won a major legal victory against George Weiss, after a federal judge ruled that the hedge fund founder is personally liable for millions in unpaid debts tied to the collapse of Weiss Multi-Strategy Advisers, according to a report by Investment News.

Founded in 1978, Weiss Multi-Strategy Advisers was once one of the industry’s most respected firms, managing over $2bn in assets. However, a combination of lavish executive spending, declining performance, and mounting debts led to its dramatic shutdown in early 2024.

On 29 February, 2024, Weiss shocked his team in a Zoom call, instructing portfolio managers to liquidate all positions. Despite declining assets, executives allegedly continued flying on private jets and distributing six-figure bonuses, while Chief Investment Officer Jordi Visser faced criticism for focusing on his personal brand instead of stabilising operations.

The final blow came when Leucadia, a strategic partner of Jefferies, demanded repayment on outstanding loans. With no funds to meet its obligations, Weiss Multi-Strategy Advisers filed for Chapter 11 bankruptcy in April 2024, leaving creditors and employees – some owed millions in deferred compensation – scrambling.

Before the bankruptcy, Weiss signed a Forbearance Agreement in February 2024 with Jefferies and Leucadia, seeking to delay payments on $53m in debts tied to a 2018 Strategic Relationship Agreement (SRA) and two Note Purchase Agreements (NPAs).

Crucially, Weiss signed the agreement both personally and on behalf of the firm, with provisions explicitly binding him. Judge Alvin K Hellerstein of the US District Court for the Southern District of New York ruled firmly in favour of Jefferies and Leucadia, granting summary judgment against Weiss.

Weiss attempted several legal defences, arguing duress, lack of consideration, and lack of mutual assent, all of which were rejected. His claims that he signed the agreement under coercion, citing threats of lawsuits and reputational damage, were dismissed as insufficient to establish economic duress, especially given his status as a seasoned financial professional with legal representation.

The ruling strengthens Jefferies and Leucadia’s position in ongoing bankruptcy litigation, where Leucadia has accused Weiss of treating the hedge fund as a “personal piggy bank”, citing $28m in executive bonuses paid while the firm was insolvent.

STP Investment Services (STP), a global provider of technology-enabled investment operations, has launched STP LaunchAdvisor, a bundled fund administration and compliance solution tailored to the needs of emerging managers.

The new solution is designed to deliver comprehensive fund administration, investor services, regulatory filings, and core policies designed for exempt reporting advisers and private fund managers.

According to a press statement, the offering “integrates fund administration and compliance into a single, cost-effective solution, eliminating the need for multiple service providers and providing the infrastructure and regulatory support emerging managers need to establish and scale their funds efficiently”.

As part of this offering, STP provides hands-on consultation to guide new managers through the complexities of launching a fund, and also connects emerging managers with a network of preferred providers, including audit, tax, prime brokerage, and legal firms, who offer competitive, cost-effective pricing on both essential and value-added services.

STP Investment Services (STP), a global provider of technology-enabled investment operations, has launched STP LaunchAdvisor, a bundled fund administration and compliance solution tailored to the needs of emerging managers.

The new solution is designed to deliver comprehensive fund administration, investor services, regulatory filings, and core policies designed for exempt reporting advisers and private fund managers.

According to a press statement, the offering “integrates fund administration and compliance into a single, cost-effective solution, eliminating the need for multiple service providers and providing the infrastructure and regulatory support emerging managers need to establish and scale their funds efficiently”.

As part of this offering, STP provides hands-on consultation to guide new managers through the complexities of launching a fund, and also connects emerging managers with a network of preferred providers, including audit, tax, prime brokerage, and legal firms, who offer competitive, cost-effective pricing on both essential and value-added services.

The technology sector has maintained its position as the most shorted sector for the third consecutive month, with Apple, IBM, Super Micro, SoFi Technologies, and Texas Instruments leading the pack, according to data from Hazeltree.

The company’s February 2025 Shortside Crowdedness Report, which tracks short selling activity across large-, mid-, and small-cap stocks, also identified Kering SA and H&M in the EMEA region, along with Disco Corporation in APAC, as some of the most shorted large-cap stocks.

Hazeltree, a specialist in active treasury and intelligent operations technology for the alternative asset industry, aggregates data from its proprietary securities finance platform, which monitors approximately 15,000 global equities. The data, compiled from a network of around 700 asset manager funds, is anonymised and provides insight into the most heavily shorted securities worldwide. Hazeltree then assigns a Crowdedness Score to each security, ranging from 1 to 99, where 99 represents the highest concentration of shorting activity.

Tim Smith, Managing Director of Data Insights at Hazeltree, noted that while the US tech sector continues to experience layoffs, the pace has slowed compared to last year. Additionally, job postings remain high, and the IT job market continues to contract.

“These trends suggest a market in transition rather than collapse, with tech companies adjusting talent strategies to align with shifting economic priorities,” Smith explained.

In the Americas, Chevron Corporation held steady as the most crowded large cap security for the second month in a row, scoring a perfect 99, while Super Micro Computer followed closely with a score of 91 and maintained the highest institutional supply utilisation at 53.27% for the third straight month.

Dayforce topped the mid-cap category with a Crowdedness Score of 99, while Shift4Payments, Inc had the highest institutional supply utilisation at 35.88%.

In terms of small-cap stocks, Wolfspeed continued its dominance as the most crowded security for the seventh consecutive month, scoring 99, while Enovix Corporation held the highest institutional supply utilisation at 85.91%.

In EMEA, Kering SA and H&M were the top contenders in the large-cap category, each scoring 99. Kering returned to the top for the second consecutive month, while H&M maintained the highest institutional supply utilisation at 76.34% for the eighth month in a row.

Kingfisher plc, BE Semiconductor Industries NV, and Delivery Hero SE were all at the top in terns of mid-cap stocks with perfect scores of 99. Carl Zeiss Meditec AG had the highest institutional supply utilisation at 51.20%.

Alphawave IP Group, meanwhile, remained the most crowded small-cap security for the third month in a row with a score of 99, while Oxford Nanopore Technologies led in institutional supply utilisation at 74.11%.

In APCA, Disco Corporation maintained its position as one of the most crowded large-cap securities with a score of 99 for the second consecutive month, while MTR Corp had the highest institutional supply utilisation at 21.07%.

Mid-ca Kokusai Electric Corporation also secured a perfect score of 99 for the second month in a row and had the highest institutional supply utilisation at 51.66%, while Tokai Carbon Co reemerged as the most crowded small-cap security, with a score of 99 for the second consecutive month. KeePer Technical Laboratory held the highest institutional supply utilisation at 74.51%.

The technology sector has maintained its position as the most shorted sector for the third consecutive month, with Apple, IBM, Super Micro, SoFi Technologies, and Texas Instruments leading the pack, according to data from Hazeltree.

The company’s February 2025 Shortside Crowdedness Report, which tracks short selling activity across large-, mid-, and small-cap stocks, also identified Kering SA and H&M in the EMEA region, along with Disco Corporation in APAC, as some of the most shorted large-cap stocks.

Hazeltree, a specialist in active treasury and intelligent operations technology for the alternative asset industry, aggregates data from its proprietary securities finance platform, which monitors approximately 15,000 global equities. The data, compiled from a network of around 700 asset manager funds, is anonymised and provides insight into the most heavily shorted securities worldwide. Hazeltree then assigns a Crowdedness Score to each security, ranging from 1 to 99, where 99 represents the highest concentration of shorting activity.

Tim Smith, Managing Director of Data Insights at Hazeltree, noted that while the US tech sector continues to experience layoffs, the pace has slowed compared to last year. Additionally, job postings remain high, and the IT job market continues to contract.

“These trends suggest a market in transition rather than collapse, with tech companies adjusting talent strategies to align with shifting economic priorities,” Smith explained.

In the Americas, Chevron Corporation held steady as the most crowded large cap security for the second month in a row, scoring a perfect 99, while Super Micro Computer followed closely with a score of 91 and maintained the highest institutional supply utilisation at 53.27% for the third straight month.

Dayforce topped the mid-cap category with a Crowdedness Score of 99, while Shift4Payments, Inc had the highest institutional supply utilisation at 35.88%.

In terms of small-cap stocks, Wolfspeed continued its dominance as the most crowded security for the seventh consecutive month, scoring 99, while Enovix Corporation held the highest institutional supply utilisation at 85.91%.

In EMEA, Kering SA and H&M were the top contenders in the large-cap category, each scoring 99. Kering returned to the top for the second consecutive month, while H&M maintained the highest institutional supply utilisation at 76.34% for the eighth month in a row.

Kingfisher plc, BE Semiconductor Industries NV, and Delivery Hero SE were all at the top in terns of mid-cap stocks with perfect scores of 99. Carl Zeiss Meditec AG had the highest institutional supply utilisation at 51.20%.

Alphawave IP Group, meanwhile, remained the most crowded small-cap security for the third month in a row with a score of 99, while Oxford Nanopore Technologies led in institutional supply utilisation at 74.11%.

In APCA, Disco Corporation maintained its position as one of the most crowded large-cap securities with a score of 99 for the second consecutive month, while MTR Corp had the highest institutional supply utilisation at 21.07%.

Mid-ca Kokusai Electric Corporation also secured a perfect score of 99 for the second month in a row and had the highest institutional supply utilisation at 51.66%, while Tokai Carbon Co reemerged as the most crowded small-cap security, with a score of 99 for the second consecutive month. KeePer Technical Laboratory held the highest institutional supply utilisation at 74.51%.

Hedge funds, including Brevan Howard, Capula and Millennium, have upped their leveraged bets on UK government bonds, amplifying concerns over potential instability in the gilts market, a key benchmark for UK borrowing costs, according to a report by Reuters.

The report cites unnamed market sources as highlighting that hedge funds now account for 60% of UK bond trading volumes, up from 53% at the end of 2023 – a trend that has drawn scrutiny from the Bank of England (BoE) and regulators.

BoE Governor Andrew Bailey recently cautioned that hedge fund activity could “propagate liquidity stress” in UK markets, particularly due to their heavy usage of short-term lending in repo markets. Repos (repurchase agreements), a key funding mechanism, have become crucial for hedge funds deploying a range of high-leverage bond trades.

Market sources indicate hedge funds are among the most active players in gilt repo financing, and are currently deploying three main strategies in UK gilts: basis trade arbitrage, whereby speculators buy futures contracts on 10-year gilts while shorting the cash bond, exploiting a pricing discrepancy; inflation trades, whereby funds are shorting 10-year gilts while buying two-year bonds, betting on persistent UK inflation; and momentum-based shorting, which has seen trend-following hedge funds short 10-year gilts for seven of the past nine weeks, according to JPMorgan data.

While these positions represent only a portion of each fund’s portfolio, their combined scale is stretching repo market capacity – raising concerns over liquidity during times of market stress.

The increasing concentration of hedge fund borrowing in UK repo markets has broader systemic implications. The BoE has warned that other financial institutions, including pension funds and insurers, could be squeezed out of repo borrowing – potentially triggering forced asset sales if liquidity dries up.

In January, a gilt market selloff forced UK pension funds to post £3bn ($3.9bn) in additional collateral, exacerbating concerns about repo market fragility. To mitigate this risk, the BoE has introduced a new liquidity facility for gilt holders, though eligibility requirements limit access to institutions holding at least £2bn in UK bonds.

Hedge funds, including Brevan Howard, Capula and Millennium, have upped their leveraged bets on UK government bonds, amplifying concerns over potential instability in the gilts market, a key benchmark for UK borrowing costs, according to a report by Reuters.

The report cites unnamed market sources as highlighting that hedge funds now account for 60% of UK bond trading volumes, up from 53% at the end of 2023 – a trend that has drawn scrutiny from the Bank of England (BoE) and regulators.

BoE Governor Andrew Bailey recently cautioned that hedge fund activity could “propagate liquidity stress” in UK markets, particularly due to their heavy usage of short-term lending in repo markets. Repos (repurchase agreements), a key funding mechanism, have become crucial for hedge funds deploying a range of high-leverage bond trades.

Market sources indicate hedge funds are among the most active players in gilt repo financing, and are currently deploying three main strategies in UK gilts: basis trade arbitrage, whereby speculators buy futures contracts on 10-year gilts while shorting the cash bond, exploiting a pricing discrepancy; inflation trades, whereby funds are shorting 10-year gilts while buying two-year bonds, betting on persistent UK inflation; and momentum-based shorting, which has seen trend-following hedge funds short 10-year gilts for seven of the past nine weeks, according to JPMorgan data.

While these positions represent only a portion of each fund’s portfolio, their combined scale is stretching repo market capacity – raising concerns over liquidity during times of market stress.

The increasing concentration of hedge fund borrowing in UK repo markets has broader systemic implications. The BoE has warned that other financial institutions, including pension funds and insurers, could be squeezed out of repo borrowing – potentially triggering forced asset sales if liquidity dries up.

In January, a gilt market selloff forced UK pension funds to post £3bn ($3.9bn) in additional collateral, exacerbating concerns about repo market fragility. To mitigate this risk, the BoE has introduced a new liquidity facility for gilt holders, though eligibility requirements limit access to institutions holding at least £2bn in UK bonds.

By Chris Schelling, CAIA, Managing Director of Private Markets at Caprock