Amid the recent bout of market volatility, global regulators are increasingly scrutinizing hedge fund leverage.
Leverage reached near-record levels in 2024, and the EU watchdog recently warned hedge funds for reaching a massive 18x leverage. European hedge funds have been running €210 billion worth of bets with only €12 billion of client assets.
Read hedge fund letters here
Treasury market turbulence drives increased scrutiny
Dan Miller, senior managing director of Outsourced Middle Office Services at fund administrator IQ-EQ, believes the recent turbulence in the Treasury markets is one of the causes for the recent scrutiny.
He explained that this is a good example of when managers are posting collateral with volatile prices for leverage.
“In history, what happened is if they were expressing their view on an equity position, when equity prices fall, Treasury prices increase because they move inverse to each other,” Miller said. “In the last few weeks, equity prices were falling in tandem with Treasury prices falling. When that happens, if the manager posted a T-bill as collateral and the value of that collateral is falling in tandem with the position expressed, they need to post additional collateral as their portfolio’s value is falling.”
