Hedge funds risk collapse as market volatility surges due to Trump's trade policies

In recent months, hedge funds have faced serious challenges due to increasing volatility in financial markets, primarily stemming from President Donald Trump’s imposition of tariffs. This situation has led to significant margin calls from hedge funds' prime brokers, as many funds have leveraged extensive borrowings to bet on the prices of US government bonds. An alarming rise in uncertainty and the potential for adverse events has been noted by the Bank of England's financial policy committee. They caution that if not managed properly, the leverage used by these hedge funds could amplify market shocks and lead to increased illiquidity. As hedge funds play a more influential role in the trading of government debt, their increased use of leverage has created a concentrated borrowing risk among a few key funds. The situation is made worse by a substantial sell-off in US Treasury bonds, where hedge funds have billions of dollars committed to the basis trade strategy, which seeks profit from small price differences in the bond market. The dwindling value of these treasury bonds raises concerns about the potential broader impact on the financial system and the ability of hedge funds to sustain their positions amidst crumbling asset values. Fears that hedge funds’ substantial bets on US government bonds might result in significant financial losses have grown considerably. The rapid downward adjustment in bond prices threatens the stability of these funds and could generate a ripple effect throughout various sectors of the financial system. Market stakeholders remain apprehensive as the fallout from Trump's trade war continues to unfold with far-reaching implications. In summary, the intersection of policy decisions by the Trump administration and the aggressive strategies employed by hedge funds are creating a precarious environment for financial markets. The heightened risk of illiquidity and rising margin calls signal potential trouble ahead for the sector, fuelling concerns of more pronounced corrections in stock and bond markets if conditions persist.