A select group of hedge fund traders, including Jonathan Hoffman, John Bonello, and Jonathan Tipermas, are currently spearheading an enormous bet on government debt known as the “basis trade.” This trading strategy focuses on exploiting minute price differentials between Treasuries and futures derivatives, making these traders pivotal figures in the world of finance. As part of a core group of approximately 10 firms, they leverage substantial amounts borrowed from Wall Street banks—often up to 50 times their own investments—to inject tens of billions of dollars into this trade, amplifying returns significantly.
The influence of these hedge funds in the basis trade has grown to such an extent that they are now integral to the buying and selling dynamics of Treasuries, a cornerstone of global capital markets. Among the key players are Jonathan Hoffman (ExodusPoint Capital Management), John Bonello (Millennium Management), and Jonathan Tipermas (Citadel), who have consistently reaped gains in the billions through this strategy.
Other significant contributors to the trade include Yan Huo and Ryan Letchworth (Capula Investment Management), Ivan Chalbaud (Citadel), Feng Guo (Symmetry Investments), Steve Brown (Balyasny Asset Management), Lorenzo Rossi (Kedalion Capital Management), and Alexander Phillips (Tudor Investment Corp). Despite their substantial impact, this group of traders largely operates behind the scenes, with an estimated 70% share in hedge fund basis-trade bets.
Regulators are now closely monitoring these hedge funds due to concerns about a potential repeat of the March 2020 scenario when the basis trade experienced a spectacular collapse, prompting Federal Reserve intervention to stabilize the Treasury market. The Securities and Exchange Commission (SEC) recently implemented new rules addressing the extensive borrowing involved in this trade, potentially altering its economic appeal. Regulators face a challenging dilemma—clamp down too severely, and the orderly functioning of the $26 trillion US Treasuries market could be compromised; go too lightly, and there is a risk of excessive financial leverage accumulating at these hedge funds, potentially necessitating Fed intervention in case of future troubles.
Kathryn Kaminski, Chief Research Strategist at AlphaSimplex Group, emphasizes the delicate balance, stating, “There are only a couple of players, and these players have made themselves too big to fail. If you limit this arbitrage, you weaken market liquidity.”
