Biggest Hedge Funds Get Best Repo Leverage Terms, BIS Finds

The world’s largest hedge funds are accumulating “substantially higher” leverage in the bond market than smaller rivals thanks to their close relationships with dealers, according to the Bank for International Settlements.

The average haircut — a reduction on the value of collateral in a repurchase agreement transaction — applied by banks to the 10 largest hedge funds was close to zero, according to BIS research published Tuesday. Such minimal haircuts allow these funds to obtain “very high levels of leverage relative to their smaller peers,” it said.