IMF paper warns of hedge fund risks
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Hedge funds are playing an increasingly important role in the two hottest markets of the moment — U.S. Treasury securities and AI stocks — and they're doing it with a lot of borrowed money.
Why it matters: In times of stress, unwinding that borrowing, or leverage, can turn a sell-off into a crisis that spreads beyond hedge funds into the banking system and the wider economy.
The latest: That was the message from a report out Tuesday from the International Monetary Fund, which in its measured way delivered a sharp warning about the growing risk that hedge funds pose to global markets.
By the numbers: Hedge fund assets have doubled since 2020, to nearly $13 trillion.
- That includes $7.7 trillion from borrowing, per Axios' calculation of IMF's data.
- "Leverage that looks perfectly manageable right now" can turn dangerous "overnight," said Valentina Bruno, a finance professor at American University, in a discussion of the paper.
Between the lines: Hedge fund is a broad term covering different kinds of private investment firms. They are known for being opaque.
- The authors gathered data for more than 25,000 hedge funds across 78 countries since 1990.
Zoom in: Their trades are getting crowded. Funds increasingly own the same stocks, and overlap among the biggest has grown since 2022, the IMF says.
- Think of it like everyone is in the same room, and when an alarm sounds, they all head for the exit at once.
- In a sell-off, more crowded stocks see more volatility, the report notes.
Stunning stat: The total size of every bet that hedge funds make — all the assets they manage, plus the face value of their derivatives — was $42.2 trillion through the first quarter.
- A lot of that is netted out — literally by hedging — but it's built with borrowed money, so it can unwind in a vicious cycle.
- For example, if an investment slumps or if markets get choppy, lenders may demand more collateral. That margin call can force funds to sell, driving prices down further, triggering more margin calls.
Flashback: Such worries arose this summer after the near blow-up of the hedge fund Situational Awareness, which borrowed heavily to invest in AI stocks.
- When AI stock prices fell in July, the fund took heavy losses, got margin calls and was forced to sell its shares.
- Another hedge fund saved the day — Ken Griffin's Citadel bought much of Situational's stock portfolio at a discount.
Reality check: In this case, there wasn't a crisis.
- "There's nothing wrong with losses," said Christian Lundblad, a finance professor at the University of North Carolina's Kenan-Flagler Business School, during the discussion of the paper.
- "That's part of the game. ... We should have a system where people who make, you know, excess bets or something sometimes take it on the chin."
Friction point: Hedge funds doubled their exposure to sovereign debt (government bonds) over the past three years, the report finds — and about two-thirds of the growth was in U.S. Treasury securities.
- Hedge funds' share of the Treasury market rose to 9% in 2025 from about 4% in 2022, the report says, largely through highly leveraged trades.
- In 2020, it was hedge funds unwinding Treasury bets that contributed to massive dislocations in global markets that prompted a rescue from the Federal Reserve.
The big picture: The financial system has undergone a transformation in recent decades, from one based on bank borrowing and lending to one where the footprint of nonbank institutions like hedge funds, private credit shops and others has exploded.
- "Risk is now moving around a wider set of players," American University's Bruno said.
