Fed Survey Sheds Light on Hedge-Fund Activity During Oct. 15 Volatility

Hedge funds made larger adjustments to their bets on U.S. interest rates than other financial firms during the U.S. Treasury markets unusual moves on Oct. 15, according to a Federal Reserve survey released Tuesday.

The Feds quarterly poll of senior credit officers at major securities dealers offered new insight into trading activity during the sudden plunge in Treasury yields that day. The dive raised questions among regulators and traders about whether new regulations or the rising role of electronic-trading technology are making the market more prone to large swings.

Hedge funds, including macro funds that invest based on broad economic trends, made relatively large adjustments in their bets on moves in U.S. interest rates between 8:30 a.m. and 10:00 a.m. on that Wednesday in October, the Fed survey of 22 dealers found.

For most other client types, dealers indicated that there was little or no change in net positioning, the Fed said. The survey was conducted during the second half of November.

The Managed Funds Association, a hedge-fund industry group, had no immediate comment.

The survey helps explain why market supervisors at the Fed and the U.S. Treasury have paid special attention to the role of speedy trading firms and hedge funds that day. Computer-driven, superfast trading has also been a focus since the speed of the market move and the volume of trading that took place were consistent with that activity. The Fed survey didnt mention high-frequency traders, but several market participants have pointed to their role in the Oct. 15 moves.

Investors that day were fleeing for the safety of government debt due to concerns about global growth, geopolitical events such as unrest in the Middle East and the Ebola scare. But market participants said the move on Oct. 15 was larger than what would have been expected based on the confluence of events leading up to it alone, suggesting other factors amplified the action that day.

The Fed survey also found that on Oct. 15 and in the following days, some dealers increased the amount of collateral, or margin, that dealers required to backstop financial contracts that referenced short-term U.S. Treasury rates. Nearly one-fifth of dealers increased margin requirements for clients such as mutual funds and pension plans during that time, the survey said.

That suggests dealers were adjusting to the more volatile trading by demanding clients post more collateral. The survey didnt specify how the margin requirements on Oct. 15 and the following days compared to previous or subsequent time periods.

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Fed Survey Sheds Light on Hedge-Fund Activity During Oct. 15 Volatility