The US Office of Financial Research’s (OFR’s) Hedge Fund Monitor (HFM) showed hedge fund Q4 repo borrowing declined 9% quarter-over-quarter to $2.5 trillion following eight consecutive quarters of growth. Notably, the Q4 decline followed a record high for hedge fund repo borrowing in Q3 and exceeded prime brokerage borrowing.
The last time repo borrowing exceeded prime brokerage borrowing by a wider margin was Q1 2020, a period of extreme market volatility. From Q4 2022 through Q4 2024, repo borrowing more than doubled (up 104%), which facilitated additional leverage for multi-strategy, macro, and relative value funds.
Hedge fund repo borrowing increased so significantly during the past two years because hedge fund investments in Treasury and foreign sovereign debt increased. This growth is primarily due to cash-futures basis, cash-swap basis, and yield curve trades, which all involve repo financing.
Historically, repo borrowing has declined in Q4 in nine of the last 12 years. However, the recent decline is notable as it was broad-based with 19 of the top 20 largest repo borrowers reducing borrowing.
This decline may have occurred for two reasons. First, banks face month-end, quarter-end, and year-end financial reporting requirements. More specifically, banks may temporarily adjust their balance sheets and lending activities to enhance certain regulatory capital ratios that are measured at the end of periods. Second, hedge funds may have locked in annual gains toward the end of last year and temporarily lowered the risk in their portfolios through reduced repo borrowing.
From Q4 2022 through Q3 2024, growth in hedge fund overnight financing across all funding sources, including repo, coincided with the increase in repo borrowing. Most of this increase resulted from a small number of large funds that are also the biggest repo borrowers.
Overnight financing and repo borrowing
