Hedge funds are using leverage to build larger positions in UK government debt, creating potential new risks in the financial system, the Bank of England has warned. Dave Ramsden, a BoE deputy governor, said in a speech on Monday that “hedge fund leverage and concentration are a specific example of the vulnerabilities that could lead to system-wide risks and warrants continued and careful monitoring”.
Multi-manager hedge funds house tens if not hundreds of trading teams running different strategies across equities, commodities, debt, foreign exchange and other markets. Such funds can quickly slash their exposure to certain assets if their central risk systems need to reduce or rebalance the overall level of risk. Ramsden also pointed to the popularity of computer-driven hedge funds that bet on market trends.