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(Bloomberg) — The Bank of England said hedge funds have faced “significant” margin calls from their prime brokers as they navigated extreme market volatility in the aftermath of US President Donald Trump’s tariff announcements and warned that the risk of “further sharp corrections” remains high.
While the central bank’s Financial Policy Committee found that so far those firms had been able to meet margin calls, it warned that the overall global risk environment has deteriorated, according to minutes from meetings it held on April 4 and April 8.
“Uncertainty has intensified,” the committee said. “The probability of adverse events, and the potential severity of their impact, has risen.”
Markets have gone haywire since Trump unveiled a raft of tariffs on trading partners around the world. Equity investors immediately headed for the exits, wiping out trillions of value. Markets continued to convulse this week, while the VIX Index, or fear gauge, rose to pandemic-era levels.
The central bank spent months last year studying how a bevy of investment banks, insurers, central counterparties, hedge funds and other asset managers can handle different forms of stress as part of its so-called system wide exploratory scenario. It ultimately warned that hedge funds, asset managers and pension providers could be “underprepared” in times of crisis.
At its meetings, the committee noted that some hedge funds had de-risked their portfolios ahead of Trump’s announcement last week, which meant they were less impacted by the volatility in markets.
Still, the central bank flagged the risk posed by the rising use of leveraged investment strategies in UK government bond markets.
Much of that recent increase could be explained by hedge fund net gilt repo borrowing, the BOE said, which rose from £4 billion at the start of 2024 to £61 billion as of March 2025. That’s within the top percentile of the historical distribution of hedge fund net positioning, going back to 2017, it added.
Hedge funds use repo markets to hold sovereign debt outright or to take positions relative to other asset classes, including the so-called basis trade that exploits the price difference of bonds and futures contracts. Market participants have speculated that wild swings in US Treasury prices over recent days are due in part to the unwind of basis trades. Gilts have also sold off heavily in the market ructions.
“Any forced or rapid unwinding of leveraged positions, particularly when concentrated, could amplify price shocks and create financial stability risks,” the committee said. Other central banks including the Bank of Canada and European Central Bank have also noted these risks.