Hedge funds based in the Cayman Islands held $1.4 trillion more in US Treasuries at the end of 2024 than what official US data reported, according to researchers at the Federal Reserve. Their total holdings surged by $1 trillion since 2022, reaching $1.85 trillion by December 2024. In contrast, the Department of the Treasury's report only showed these funds owning $423 billion, indicating a significant underreporting issue. This discrepancy is primarily attributed to the growth of the Treasury cash-futures basis trade.
The basis trade, which involves shorting a Treasury futures contract and going long on a repo-financed Treasury security, has soared to approximately $830 billion by September 2025, double its peak in early 2020. This strategy now accounts for 35 percent of hedge funds' total long Treasury exposures, with overall hedge fund long Treasury exposures reaching $2.4 trillion by the end of 2025, up from $600 billion in 2014. The trade's high leverage and interconnectedness across Treasury cash, futures, and repo markets pose financial stability risks, reminiscent of the rapid unwinding that contributed to the March 2020 Treasury market stress.
Hedge funds' increased reliance on these leveraged arbitrage strategies has led to a significant demand for repo borrowing, reaching roughly $1.8 trillion, or 6 percent of marketable notes and bonds, by year-end 2025. This surge in repo borrowing has caused a widening spread between secured and unsecured funding rates. The Dallas Federal Reserve highlights that hedge funds have become crucial marginal buyers of Treasuries, particularly as outstanding Treasuries outstrip growth in real money accounts. The undercounting of Cayman-domiciled hedge funds' Treasury holdings, estimated at $1.4 trillion by the end of 2024, creates a significant challenge for researchers and policymakers trying to understand cross-border flows and their impact on the US economy and financial markets.
