We bring up all of this because it's almost time for the Fed's next hedge fund bailout.
Bloomberg reports that a panel of financial experts advised the Fed to set up an emergency program that would close out highly leveraged hedge-fund trades "in the event of a crisis in the $29 trillion US Treasuries market."
According to the experts, a vicious unwinding of the roughly $1 trillion in hedge fund arbitrage bets would not only hamper the Treasuries market, but others as well, "requiring Fed intervention to assure financial stability." When the US central bank did that in March 2020, during the initial Covid crisis, it engaged in massive outright purchases of Treasury securities, to the tune of about $1.6 trillion over several weeks.
So, the thinking goes, since the Fed is powerless to regulate several multibillionaire hedge fund managers and rein them in, the next obvious action is to prepare trillions in taxpayer funds for another massive bailout enema, and leave them on the hook for trillions in capital just so the billionaires can keep on billionaireing.
For those asking who is behind these basis trades, we share our updated chart of hedge fund leverage among the 6 largest multi-strat funds, all of whom are known to aggressively participate in basis trades. As seen below, the regulatory capital of just the "Big 6" multistrats - Millennium, Citadel, Balyasny, Poin72, ExodusPoint and Lighthouse - is a record $1.5 trillion, an increase of $300 billion from the previous year.
What is far more scary is that the average regulatory leverage, or the ratio of regulatory assets (i.e., levered exposure) to assets under management (or actual, tangible capital), has increased to a record 7.8x from 6.3x a year ago!
