The Role of Hedge Funds in the 2020 Treasury Market Turmoil

This paper provides new evidence about the behavior of hedge funds during the disruptions that occurred in the Treasury market in March 2020. In contrast to some recent policy papers arguing that hedge funds were a major amplifier of those disruptions, we show that aggregate Treasury positions held by hedge funds were far too small to be the main disruptive factor. Moreover, we find that a range of parties, especially non-US official institutions, sold Treasuries as they sought to lock in US dollars in cash. The hedge funds implementing the Fixed Income Relative Value strategy behaved in a way that was consistent with market expectations as they faced challenging financing conditions when banks abruptly withdrew from funding their positions in the repo market. Overall, this evidence also highlights important vulnerabilities of the Treasury market. Since the last financial crisis, exploding federal deficits led to a significant increase in the stock of marketable Treasuries which outstripped the capacity of dealers to safely intermediate the market on their own balance sheets.