Hedge funds domiciled in the Cayman Islands may hold $1.4tn more in US Treasuries than official data indicates, with the discrepancy underscoring how basis trades and repo financing mask the scale of hedge fund exposure, according to a report by Bloomberg citing researchers at the Federal Reserve.

The Fed researchers, including Daniel Barth and Daniel Beltran, noted that Cayman-based funds’ holdings jumped by $1tn since 2022, reaching $1.85tn by the end of 2024. By contrast, the US Treasury’s official figures reported only $423bn in holdings. The gap suggests the Caymans have overtaken China, Japan, and the UK as the largest foreign holder of U.S. government securities.

The divergence is largely attributed to basis trades, where hedge funds short Treasury futures while buying the underlying securities, profiting from price differentials. These trades are typically financed via the repo market, with the purchased Treasuries pledged as collateral. Because the securities move between custodians, official data may undercount the funds’ actual ownership, even though the economic interest remains with the hedge funds.