#What’s driving hedge funds’ surge in the UK bond market?
Hedge funds captured 60% of the trading volumes in UK government bonds on Tradeweb’s electronic platform in early 2025, marking a significant increase from 53% at the end of 2023. This rise represents the highest market share for hedge funds in five years, indicating their growing influence.
#How are hedge funds using leverage in their strategies?
Prominent macro funds such as Brevan Howard, Capula Investment Management, Millennium Management, and Rokos Capital Management are leading this charge. These firms utilize repo financing—a method of borrowing against securities—to execute various strategies, including basis trades, inflation hedges, and trend-following positions, particularly focusing on 10-year gilts.
Basis trades involve capitalizing on minute price discrepancies between cash bonds and their futures counterparts. Although profits on these trades are typically small, the use of significant leverage makes them viable for hedge funds.
The UK gilts market holds an impressive yet modest value of around £2.5 trillion, which is approximately $3.2 trillion. Compared to the much larger US Treasury market, crowded trades in a smaller market can have substantial effects on pricing.
#Why are banks stepping back from this market?
For the past decade, banks have gradually withdrawn from active market-making roles. Post-financial-crisis regulations have constrained their balance sheets, making it less cost-effective for them to maintain large inventories of bonds. As a result, hedge funds have stepped in to fill the gap, utilizing platforms like Tradeweb, which offer efficient electronic trading and pricing data in partnership with FTSE Russell.
The role of non-bank entities such as hedge funds has raised concerns for the Bank of England, especially regarding liquidity pressures in the gilt market.
#What happens with tokenized gilts?
Looking ahead, Tradeweb has begun exploring on-chain repo transactions involving tokenized gilts within the Canton Network as of early 2026. This innovation could enhance collateral management and settlement processes in the bonds market.
#Why should investors pay attention to this market?
As events unfold, challenges arise during periods of market stress when a notable portion of trading volume is sourced from leveraged players adopting similar strategies. Increased correlation among these strategies during crises could amplify market volatility.
Investors in the crypto and digital asset sectors should closely monitor the development of tokenized repos on the Canton Network. The potential adoption of tokenized government bonds as collateral in repo markets could forge new connections between decentralized finance and sovereign credit markets.