Hedge funds' long exposures to U.S. Treasury securities reached an estimated $2.4 trillion by the end of 2025, expanding from roughly $600 billion in 2014. This significant increase underscores hedge funds' growing role as key marginal buyers of Treasuries. The primary drivers of this exposure are highly leveraged arbitrage strategies, particularly the Treasury cash-futures basis trade and swap spread arbitrage.
The cash-futures basis trade alone accounted for approximately $830 billion of these exposures as of September 2025, which is more than double its previous peak in early 2020. This trade now represents 35% of hedge funds' total long Treasury holdings. The swap spread arbitrage trade also saw substantial activity, reaching about $305 billion (13%) by September 2025, although it experienced a rapid unwinding of approximately $60 billion after tariff announcements in April 2025 before recovering.
Beyond these direct arbitrage plays, the remaining exposures include $395 billion (17%) in maturity-matched trades, $375 billion (16%) in steepener-like trades, and additional holdings in unencumbered cash, flattener-like trades, and long-only investments. The growth in these leveraged trades has also led to a substantial increase in hedge funds' net repurchase agreement (repo) borrowing, which hit roughly $1.8 trillion by year-end 2025, or 6% of marketable notes and bonds.
This increased leverage in the Treasury market, particularly from Cayman Islands-domiciled hedge funds engaging in the basis trade, has led to a significant undercounting in official U.S. Treasury International Capital (TIC) data. Researchers estimate that the TIC data undercounted Cayman-held Treasuries by approximately $1.4 trillion as of late 2024. This discrepancy highlights challenges in accurately assessing cross-border financial flows and their impact on U.S. financial markets.
