News this week that Element Capital Management, a New York hedge fund, was pouring billions into Treasury auctions may have stunned traders because of the sums involved. Yet hedge funds’ growing presence in Treasurys should come as no surprise.
Hedge funds are stepping up their involvement in the $12.8 trillion Treasurys market, picking up the slack from Wall Street dealers and amassing a record amount of U.S. government debt.
News last week that Element Capital Management, a New York hedge fund, was pouring billions into Treasury auctions may have stunned traders because of the sums involved. Yet hedge funds’ growing presence in Treasurys should come as no surprise.
Asset managers domiciled in the Caribbean, seen as a proxy for hedge funds, held $318.5 billion of U.S. government debt as of midyear, an all-time high, the most recent Treasury data show. The barons of risk-taking are adding liquidity to the market as securities firms have stepped back because of heightened regulations after the financial crisis.
The money managers are poised for swings in fixed-income prices as the debate rages over when the Federal Reserve will raise interest rates. Treasurys’ volatility surged to a six-month high in August amid China’s currency devaluation and a global equities rout. The turbulence rewarded bets on sharper price fluctuations in bonds amid global instability and diverging central bank policies.
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“There are a lot of cross currents in the marketplace and a lot of competing macro calls,” said Jason Evans, co-founder of NineAlpha Capital, a New York hedge fund specializing in U.S. government debt.
There are more trading opportunities for hedge funds since securities firms curbed risk-taking in the face of higher capital requirements set by the Basel Committee on Banking Supervision and the Dodd-Frank Act in the U.S.
The 22 primary dealers that trade Treasurys with the Fed cut their inventories by 46 percent to $78.7 billion as of last month, from a peak of $146 billion in 2013, Fed data show.
“The pendulum has swung a little from the banks to the buy side, including both traditional asset managers and hedge funds,” Evans said.