Hedge funds nearly triple their US Treasury holdings to US$2 trillion
Noah Hamman, founder of AdvisorShares, told CNBC that most pension plans and insurers have “long term time horizons” and focus on “liability matching.”
Hedge funds focus on performance, he said, typically over a shorter term and on “high watermarks and benchmark-beating returns.”
Much of the activity involves relative-value strategies, the most prominent being the Treasury cash-futures basis trade, in which funds buy cash Treasuries while selling corresponding futures and expect to gain from the price difference between the two markets.
Because that differential is typically tiny, funds use substantial leverage, borrowing against Treasury collateral in the repo market to build positions many times larger than their underlying capital.
Leveraged basis-trade positions have fallen about 20 percent this year to US$1.2tn, according to Morgan Stanley estimates cited by CNBC.
