- The Bank of International Settlements warns that hedge funds’ current $600 billion short position against US Treasuries could lead to a damaging sell-off.
- Hedge funds are using a strategy called the relative value trade, which capitalizes on small differences between Treasury and futures contract values by buying actual Treasuries while selling Treasury futures contracts at the higher price.
- Given the small profit margins, funds must use margin (borrowed money) to profit from this strategy.
- Rapid tightening of margin requirements could spark financial turmoil.
