The Federal Reserve Bank of New York is investigating the risks associated with hedge funds holding approximately $2 trillion in US Treasury securities. This volume accounts for nearly 7% of the total market, as hedge funds have replaced pension funds that reduced their fixed-income allocations from historical levels of 40% to between 10% and 15%.
Regulators are focused on the strategies employed by these funds, particularly relative-value trading. As of late 2025, roughly $830 billion of hedge fund exposure was attributed to basis trades. This strategy involves exploiting price differences between bonds and futures, often utilizing leverage ratios of 50-to-1 or higher to amplify returns on small spreads.
The concern stems from the structural differences between traditional pension fund ownership and the leveraged positions of hedge funds. While pension funds historically acted as market ballast by holding bonds for long periods, hedge funds are susceptible to margin calls during market stress. This dynamic mirrors the conditions seen during the March 2020 market seizure.
The New York Fed is evaluating whether current market stability requires new regulatory measures, such as stricter margin rules, position limits, or enhanced transparency requirements. The inquiry aims to address the potential for increased volatility if these leveraged positions are forced to unwind simultaneously during future market shocks.
