Senior sovereign debt officials are increasingly recognising the growing role of hedge funds in government bond markets, with some arguing that their presence is enhancing liquidity and price discovery, even as concerns about systemic risk remain, according to a report by Bloomberg.
Speaking at the FT Global Bond Summit in London, debt managers from Canada, Germany and Italy described a shift in perception regarding hedge fund participation, moving from earlier caution toward a more balanced assessment of their market impact.
Matt Emde, director general for funds management at Canada’s Department of Finance, said views within the sovereign issuance community have evolved as hedge fund activity has deepened.
Emde estimated that hedge funds now account for roughly 30% to 50% of demand in Canadian government bond auctions, noting that their behaviour often resembles that of “shadow dealers” due to their willingness to hold inventory before redistributing it into secondary markets.
Officials from Germany and Italy also acknowledged that hedge fund strategies have become an important feature of modern sovereign debt markets, particularly as traditional bank proprietary trading desks have been scaled back following regulatory reforms. These strategies, they said, can support arbitrage activity and improve pricing efficiency across different maturities and jurisdictions.
However, concerns over potential financial stability risks persist. In the UK, where hedge funds account for more than half of electronically traded gilts, regulators including Bank of England Governor Andrew Bailey have previously warned that highly leveraged positions could amplify market stress if unwound rapidly.
Italy’s debt chief Davide Iacovoni struck a more cautious tone, acknowledging the functional role hedge funds play in markets while highlighting the potential downside during periods of volatility.
The discussion comes at a time when sovereign borrowing costs remain elevated following successive shocks, including the post-pandemic rate adjustment cycle and geopolitical tensions linked to the war in Iran. These pressures have heightened scrutiny of investor behaviour in core government bond markets, particularly following the UK gilt market turmoil in 2022.
Officials emphasised the need for greater understanding of hedge fund strategies and market roles going forward, noting the diversity of approaches across the sector.
