Hedge Funds and Treasury Market Price Impact: Evidence from Direct Exposures

Ron Alquist and Ram Yamarthy

No 22-05, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: The increasing importance of non-bank financial intermediaries has raised new questions about the risks that hedge funds pose to the financial system. The OFR examined how changes in hedge fund exposures affect U.S. Treasury prices and the yield curve. Using confidential hedge fund data from the SEC's Form Private Fund (PF), OFR analysts calculated hedge funds' aggregate, net Treasury exposures, and their fluctuations over time. This revealed economically significant and consistent evidence that changes in hedge fund exposures are related to Treasury yield changes. Furthermore, particular strategy groups and lower-levered hedge funds were seen to have a larger estimated price impact on Treasuries. Finally, asset pricing tests show that U.S. Treasury investors demand additional return compensation due to the risks associated with hedge fund demand (Working Paper no. 22-05).

Date: 2022-08-23
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