68.1 This is the Hedge Fund Trade that Blew Up in 2020
———Part 1 Summary———
The rise and fall of an arbitrage trade by hedge funds known as the Treasury cash-futures basis trade. That was the focus of an excellent research paper by two government researchers. But there’s just one problem. They don’t ask what caused the rise of the basis trade in the first place.
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———Ep 68.1 Topics———
01:19 What is a repurchase agreement “haircut”? Why are some haircuts bigger than others?
04:39 Cash borrowers gain tremendous leverage when employing a US Treasury as collateral.
08:15 Arbitrage opportunities in US Treasury markets appear between spot and future prices.
13:33 Money Dealers are ‘responsible’ / supposed to police these arbitrage opportunities
15:57 Money Dealers didn’t jump on the US Treasury basis trade, so hedge funds did.
20:32 Is it important that financing the hedge fund-led basis trade was in repo markets?
21:28 What is the Money Dealer’s warehouse activity and why is it fundamentally important?
23:26 The basis trade earnestly began in early-2018 just as monetary disorder gained momentum
26:09 An official study of the 2018-20 basis trade came to three conclusions
29:15 The official study did an excellent job focusing on the basis trade BUT NOT THE WHY!!?!
31:55 It is unsettling that such an important function is being outsourced to leveraged traders
33:21 Final concluding, summarizing thoughts by Jeff.
———Ep 68.1 References———
A Profound Statement In the Ongoing Saga of Shadow Money: https://bit.ly/3aOcHcs
Hedge Funds and the Treasury Cash-Futures Disconnect: https://bit.ly/3nIqFBV
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7