Hedge funds have increased their exposure through the basis trade, which involves the arbitrage of small differences between Treasury futures and cash bonds. The strategy depends on high leverage funded through repo agreements and lines.
Market estimates place total borrowing linked to these positions at around 6.6 trillion dollars. Some repo deals are described as “zero haircuts,” which means lenders require little or no collateral buffer at entry.
High leverage leaves these positions exposed to shifts in interest rates and funding costs. Even minor yield moves can prompt margin calls from repo lenders, which may force funds to scale back or exit trades. Recent data shows repo borrowing has more than tripled since 2019, while prime brokerage exposure has climbed to about $3.2 trillion.
This rise links to lower participation from traditional bank buyers, which has pushed hedge funds into a bigger role in providing liquidity in the . As a result, central banks continue to track these developments while monitoring stability in short-term funding markets.