Hedge funds are piling into a risky trade that could lead to a rout in a sudden market downturn, the Bank of England warned Tuesday.
In the so-called basis trade, hedge funds buy government bonds—known as “gilts” in the U.K.—and sell linked futures contracts.
By doing so, they can profit from a small price gap between the two related instruments. Funds typically borrow heavily to juice their returns, often through the repo market, where they use bonds as collateral to obtain short-term cash.