Hedge Funds Accurately Accumulate $13 Trillion Assets with 9% of the American Treasuries
Hedge funds are a popular investment tool that has significantly gained ground since 2013, when gross assets jumped three times to $13 trillion, while gross notional exposures, which include on and off-balance-sheet positions, stand near $40 trillion. In 2025, hedge funds will have about 9 percent of the US Treasury.
Why hedge funds can amplify stress
Hedge funds have a lot of flexibility when it comes to borrowing and taking short positions. While this is normally a good thing, it can lead to forced selling when the market stresses. Margin calls can force funds into reducing their positions, and crowded trades can cause many funds to sell the same things at the same time.
The IMF finds that stocks most heavily owned by hedge funds are 10 percentage points more volatile during periods of stress and have peak-to-trough losses that are 4 percentage points greater than the least crowded stocks. Stress can spill over to prime brokers, the big banks that fund the hedge funds, and cause problems elsewhere, including in less liquid stock markets.
What Policymakers Should Do
Many authorities lack data on leverage, derivatives, prime broker clients, and cross-border activities. The first priority is to get better reporting and information sharing. Then, to respond to the risks, regulators should impose minimum margins and haircut requirements as a systemic deleveraging measure and introduce leverage limits or capital charges for concentrated positions.
