OFR: Hedge Funds and Repo Reversal
The U.S. Treasury's Office of Financial Research (OFR) published a brief, "OFR Hedge Fund Monitor Shows Repo Reversal," which tells us, "The OFR's Hedge Fund Monitor (HFM) was updated in late April to reflect Q4 2024 Securities and Exchange Commission (SEC) Form PF data for Qualifying Hedge Funds. Hedge fund Q4 repurchase agreement (repo) borrowing declined 9% quarter-over-quarter to $2.5 trillion following eight consecutive quarters of growth. Repo borrowing is a key source of leverage for hedge funds. In these secured borrowing transactions, hedge funds borrow cash by posting securities, such as U.S. Treasury and foreign sovereign debt, as collateral. If a hedge fund defaults on its repayment obligation, the lender can sell the collateral to repay its loan. By creating a secure and flexible market for temporarily monetizing government debt, repo markets improve the efficiency of financial markets more broadly." The update explains, "Notably, the Q4 decline followed a record high for hedge fund repo borrowing in Q3 and exceeded prime brokerage borrowing.... The last time repo borrowing exceeded prime brokerage borrowing by a wider margin was Q1 2020, a period of extreme market volatility. From Q4 2022 through Q4 2024, repo borrowing more than doubled (up 104%), which facilitated additional leverage for multi-strategy, macro, and relative value funds." It adds, "Hedge fund repo borrowing increased so significantly during the past two years because hedge fund investments in Treasury and foreign sovereign debt increased. This growth is primarily due to cash-futures basis, cash-swap basis, and yield curve trades, which all involve repo financing. Growth in these trades is a function of many underlying developments, including increased issuance in Treasury and foreign sovereign debt markets. As these markets have grown, so too have hedge fund positions. Historically, repo borrowing has declined in Q4 in nine of the last 12 years. However, the recent decline is notable as it was broad-based with 19 of the top 20 largest repo borrowers reducing borrowing."
