Bank of England raises alarm over £100bn hedge fund pyramid in UK government bonds
The Bank of England warns of a potential crash in the UK government bond market as hedge funds have built up positions worth nearly £100 billion by leveraging bonds for extensive borrowing. This heightened activity poses risks of ‘fire sales’ should a financial shock occur.
According to Bank of England data, hedge funds had borrowed £99.9 billion from banks by the end of November 2022 to recycle investments into UK gilts, a tenfold increase from the previous year. Hedge funds now account for about one-third of all UK government bond trading, up from roughly 10% during stable periods. Most of these funds are large, predominantly American hedge funds.
Comment by Vladislav Nikulin: “This situation in the UK gilt market highlights a classic case of hidden systemic risk, where ample liquidity conceals excessive leverage. The growing concentration of positions among hedge funds—particularly foreign ones—makes the market highly sensitive to shocks. Any sudden stress could trigger forced liquidations and sharp volatility spikes, turning a technical issue into a broader financial stability concern for the UK.”
The Bank of England cautions that a sudden economic or financial shock could trigger mass selling, potentially leading to a financial market crisis in the UK.
