Bank of England Raises Alarm Over Hedge Fund Gilt Bets

Hedge funds have significantly increased their involvement in the UK gilt market, now accounting for one-third of all gilt trades, a rise from 15% in previous years. This surge is attributed to hedge funds leveraging the risk-free status of gilts to borrow substantial amounts, with recent data indicating that they borrowed £99.9 billion from banks to reinvest in gilts by the end of November 2026. This figure represents a tenfold increase from just over £10 billion a year prior.

Bank of England alarm as hedge fund gilt bets hit £100bn

Chris Coghlan, a Liberal Democrat MP on the select committee, noted that a small number of predominantly US hedge funds are responsible for 90% of all net borrowing in this sector. The Bank of England has expressed concerns that a sudden economic or financial shock could lead to "fire sales" of gilts, potentially destabilizing financial markets. Coghlan emphasized the importance of monitoring these hedge funds, stating that their activities could amplify the effects of any market disruptions.

Bank of England alarm as hedge fund gilt bets hit £100bn

Economists have drawn parallels between the current situation in the UK and the US, where hedge fund exposure to US Treasuries surged by nearly $1 trillion between 2017 and 2019. During the onset of the COVID-19 pandemic in March 2020, a rapid unwinding of leveraged bets by hedge funds contributed to significant volatility in the US Treasury market, prompting the Federal Reserve to intervene with a $1 trillion purchase of US debt to stabilize the situation.

Bank of England alarm as hedge fund gilt bets hit £100bn

In response to these growing concerns, regulators are finalizing proposals aimed at curbing the risk-taking behavior of hedge funds. These proposals include requiring trades to be directed towards central clearing houses, which would impose margins that could reduce hedge fund profits. Additionally, policymakers are considering implementing a "haircut" on assets used in repo transactions, effectively lowering their valuation and diminishing the attractiveness of such borrowing practices.

Bank of England alarm as hedge fund gilt bets hit £100bn

The Alternative Investment Management Association and the Managed Funds Association, representing the hedge fund industry, have criticized the Bank of England's discussion paper on these proposed changes. Sir Dave Ramsden, the Bank’s deputy governor, has indicated that regulatory changes are imminent, stating, “We don’t think the status quo here is an option. Something needs to be done.”

Bank of England alarm as hedge fund gilt bets hit £100bn

The Bank of England's alarm over the escalating involvement of hedge funds in the gilt market highlights the potential risks associated with their leveraged trading strategies. As regulators move towards implementing new measures to mitigate these risks, the balance between market stability and hedge fund profitability remains a critical concern for policymakers.

Bank of England alarm as hedge fund gilt bets hit £100bn