Hedge Fund Bets Made March Market Chaos Much Worse, BOE Says

(Bloomberg) -- The Bank of England is planning to ask “hard questions” about highly leveraged investors after hedge funds contributed to extreme market volatility during the coronavirus outbreak.

Andrew Hauser, the BOE's executive director of markets, said on Thursday that hedge-fund trading strategies in U.S. government debt morphed into “stress amplifiers” in March, when fund managers raced to meet rising margin calls.

“Initially these trades were conducted quietly. But as time went on, their speed and size –- running to hundreds of billions of dollars –- began to overwhelm dealers,” Hauser said at an event hosted by Bloomberg. Hauser called this development a “classic doom loop.”

The BOE said last month that hedge funds had to meet margin calls on $90 billion of government-debt trades in the turbulent early weeks of the coronavirus crisis in Europe and the U.S.

“Are we comfortable with the central role played by highly-leveraged but thinly-capitalized non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify instability so starkly?” Hauser said, adding that the BOE's financial policy committee will reflect on this issue in the months ahead.

Hauser said the U.K. will continue to press the financial industry to end its reliance on Libor, the scandal-plagued benchmark, by the end of 2021. The U.K. and U.S. have allowed the rate to underpin emergency loans during the pandemic.

“Having to pay loans based on rates that are themselves based on nothing at all is I think, actually, one of the untold tragedies of this crisis,” Hauser said. “We're as committed as we've ever been to helping the industry move off this thing by the end of next year. Challenging but essential.”

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