Before Fed Acted, Leverage Burned Hedge Funds in Treasury Market
- Basis traders were borrowing as much as 50 times their wagers
- ExodusPoint, LMR Partners among the losers in popular trade
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When coronavirus panic kicked off unprecedented turmoil in Treasuries last week, hedge fund leverage was lurking.
The firms use borrowed money from the repurchase market for the popular basis trade, which exploits price differences between cash Treasuries and futures. Though individual firms’ borrowing is a closely guarded metric, people familiar with the transactions said some of them levered up as much as 50 times their own wagers. Leveraged funds’ exposure to the basis strategy could be as much as $650 billion, JPMorgan Chase & Co. strategists said.