As the federal government issues more debt, hedge funds are playing a larger role in financing it — and that growing influence is beginning to affect how monetary policy works. Here are three things to know from a new Federal Reserve Bank of Dallas study, titled “Rising Hedge Fund Leverage Affects Monetary Policy Implementation” by economists R. Jay Kahn and Matthew McCormick:
1. Hedge funds are becoming increasingly important buyers of U.S. Treasuries
Traditional investors such as pension funds, insurance companies, mutual funds, ETFs, and foreign reserve managers have not kept pace with the growth in Treasury issuance. Hedge funds have stepped in to fill the gap, increasing their Treasury holdings from about $600 billion in 2014 to $2.4 trillion by the end of 2025.
2. Their Treasury purchases are heavily dependent on borrowing
Many hedge funds employ leveraged trading strategies, including the cash-futures basis trade and swap spread trade, which rely on financing through the repo market. By year-end 2025, hedge funds had approximately $1.8 trillion in net repo borrowing, equal to roughly 6% of all marketable Treasury notes and bonds.
3. That leverage is influencing the transmission of Federal Reserve policy
The Dallas Fed study found that increased hedge fund borrowing tends to push repo rates higher relative to both the federal funds rate and Fed-administered rates. Researchers estimate that the growth of leveraged Treasury trading over the past decade has widened repo-market spreads by 10 to 20 basis points, making hedge fund activity a growing factor in how monetary policy affects financial markets.