LTCM Redux? Hedge Fund Treasury Trading and Funding Fragility

81 Pages Posted: 5 Apr 2021 Last revised: 19 Jul 2022

See all articles by Mathias S. Kruttli

Mathias S. Kruttli

Board of Governors of the Federal Reserve System; University of Oxford - Oxford-Man Institute of Quantitative Finance

Phillip Monin

Board of Governors of the Federal Reserve System

Lubomir Petrasek

Board of Governors of the Federal Reserve System

Sumudu W. Watugala

Indiana University - Kelley School of Business - Department of Finance; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 6, 2022

Abstract

During the March 2020 U.S. Treasury (UST) market turmoil, the average UST trading hedge fund saw significant losses and reductions in portfolio exposures, but bilateral repo lending relationships proved resilient sources of funding. Analyzing fund-creditor borrowing data reveals that more regulated dealers provided and more important clients received disproportionately more funding. Reduced hedge fund UST liquidity provision was related to fund-specific internal risk limits and expected future redemptions, rather than creditor regulatory constraints. Despite low contemporaneous outflows, hedge funds boosted cash and reduced portfolio size and illiquidity, suggesting precautionary liquidity management motives for reduced arbitrage activity.

Keywords: Hedge funds, Treasury markets, relative value, arbitrage, risk constraints, VaR, creditor constraints, liquidity

JEL Classification: G11, G23, G24, G01

Suggested Citation

Kruttli, Mathias S. and Monin, Phillip and Petrasek, Lubomir and Watugala, Sumudu W., LTCM Redux? Hedge Fund Treasury Trading and Funding Fragility (July 6, 2022). Available at SSRN: https://ssrn.com/abstract=3817978 or http://dx.doi.org/10.2139/ssrn.3817978

Mathias S. Kruttli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/mathias-s-kruttli.htm

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

HOME PAGE: http://sites.google.com/site/mathiaskruttli/home

Phillip Monin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lubomir Petrasek

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sumudu W. Watugala (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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