A Bank of Canada (BoC) report showed that hedge funds represent around 36% of the daily volume of repo transactions from clients to dealers where Government of Canada (GoC) bonds are the collateral. This is the largest share when compared with those of other types of clients, providing some indication of hedge funds’ potential use of leverage to magnify their returns from trading GoC bonds.
The Investment Industry Association of Canada highlighted several findings from the report:
- Hedge funds represent 28% of transaction volume in the Government of Canada bond market, the second highest share following wealth managers (31%).
- When market participants sell government bonds, hedge funds on balance, most times, buy bonds, making markets more liquid and efficient. In effect, they take opportunistic positions in Government of Canada bonds that may be temporarily mispriced.
- But, in periods of market turmoil (eg. March 2020), hedge funds were net sellers of Government of Canada bonds just like other market participants, adding to strains on market liquidity.
Under a new rule enacted by the SEC on May 3, 2023, large hedge fund advisers will be required to file a current report within 72 hours from the occurrence of one or more trigger events that could indicate significant stress at a fund or signal risk in the broader financial system. Such events include extraordinary investment losses, significant margin and default events, and events associated with withdrawals and redemptions.