- BOE warns crowded, highly leveraged gilt basis trades (nearly £100bn repo) risk disorderly, market-wide unwind if funds deleverage simultaneously.
- Concentration risk: over 90% of net gilt repo borrowing by a few funds, many managed outside the UK, amplifying systemic spillovers.
- Retail investors' 2021 warnings proved prescient—leverage-driven squeezes can spark contagion; regulators face pressure to impose repo reforms.
The financial world got another wake-up call this week when the Bank of England (BOE) highlighted escalating risks in the UK government bond market, specifically tied to hedge funds’ aggressive use of a strategy called the basis trade.
This isn’t just some niche concern—it’s about the potential for market turmoil if these leveraged positions unwind chaotically.
And while regulators are finally paying attention, everyday retail investors have been shouting about similar hedge fund dangers for years, ever since the wild rides of GameStop and AMC back in 2021.
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Let’s dive into what the BOE is saying, why it matters, and how it connects to those long-standing gripes from the little guys in the market.
Buckle up; there’s a lot to unpack here.
The BOE’s Stark Warning: A Ticking Time Bomb in Gilts?
On December 2, 2025, the Bank of England dropped its latest financial stability report, and it didn’t mince words about the growing vulnerabilities in the gilt market—that’s UK government bonds, for the uninitiated.
Hedge funds have ramped up their net gilt repo borrowing to nearly £100 billion ($132 billion) as of November, the highest level since the BOE started tracking this data.
Repo borrowing essentially means these funds are borrowing cash by putting up gilts as collateral, and it’s fueling a surge in basis trades.
What’s a basis trade? It’s a relative-value play where funds exploit tiny price discrepancies between actual bonds and their futures contracts.
Sounds harmless enough, right? But the BOE points out that these trades are heavily leveraged, meaning funds are borrowing big to amplify their bets.
The problem? A handful of funds dominate this space—more than 90% of that net borrowing comes from just a small group.
If a market shock hits, these players might all rush to deleverage at once, sparking sharp price swings and potentially a vicious cycle of forced selling.
“The small number of funds running crowded and heavily leveraged trades in the gilt repo market increases the potential risk of sharp moves as funds could need simultaneously to deleverage in response to a shock,” the BOE stated in its report.
They urged market participants to “risk-manage their positions to take account of potential shocks, including correlation shifts outside historical norms.”
This isn’t the first time the BOE has flagged hedge fund leverage in gilts.
Back in July 2025, they warned about the risk of fire sales, and they’ve been pushing for reforms like leverage limits on repo transactions.
But industry pushback has been fierce—lobby groups argued last month that such rules could dry up liquidity and make gilts less appealing.
At a press conference, Sarah Breeden, the BOE’s deputy governor for financial stability, emphasized the stakes:
“The resilience of the gilt repo market is fundamental to the resilience of the sovereign bond market which is the basis on which all financial-market activity in the UK takes place.”
She added that the central bank would respond to feedback on its repo proposals “soon.”
It’s worth noting that most of these positions are run by funds managed outside the UK, with US-based managers handling about 60% of them.
That global angle adds another layer of complexity, as regulators worldwide grapple with non-bank risks.
Why This Matters Beyond the City of London
Gilts aren’t just esoteric financial instruments—they underpin everything from pension funds to everyday borrowing costs.
If volatility spikes due to a hedge fund meltdown, it could ripple through the economy, hiking rates and squeezing liquidity.
The BOE acknowledges that leveraged players like hedge funds can actually help markets by improving liquidity and price discovery under normal conditions.
But when things go south, that “warehousing risk” turns into a liability, amplifying shocks.
One big issue the BOE highlighted is the opacity in parts of the gilt repo market, which makes it harder to spot and mitigate these buildups.
It’s a reminder that even in 2025, with all our fancy tech and data, blind spots persist in high finance.
This echoes concerns in other markets, like US Treasuries, where basis trades have also been blamed for volatility.
Bloomberg strategists noted that “the relatively high use of leverage by firms taking crowded positions in the so-called cash-futures basis trade in the gilts repo market is stoking the risk of a disorderly unwind of positions.”
Recent gilt volatility? Yeah, this might be part of it.
Retail Investors’ Prophetic Warnings: From GameStop to Now
Here’s where it gets interesting—and a bit frustrating for anyone who’s followed the markets closely.
While the BOE’s alert feels fresh to some, retail investors have been banging the drum about hedge fund risks for over four years, dating back to the 2021 GameStop (GME) and AMC Entertainment sagas.
Remember January 2021? A horde of retail traders, coordinated on platforms like Reddit’s WallStreetBets, piled into heavily shorted stocks like GameStop, triggering a massive short squeeze that inflicted billions in losses on hedge funds like Melvin Capital.
It wasn’t just about memes; it exposed how hedge funds’ over-leveraged short positions could backfire spectacularly, creating systemic vulnerabilities.
Retail folks—often dubbed “apes” in those communities—have since warned repeatedly about practices like naked shorting, market manipulation, and the dangers of hedge funds dominating with borrowed money.
They argued that these big players create imbalances that hurt everyday investors and the broader market.
One academic paper described the GameStop frenzy as “the highest profile example of the reemergence of capital market participation by retail investors,” highlighting how it shifted power dynamics.
By July 2021, experts were already noting that retail investors had “upended conventional market dynamics,” replacing hedge funds as the “800-pound gorilla” in some spaces.
And in the wake of GameStop, reports showed hedge funds tilting more toward bullish bets, but the underlying risks of leverage persisted.
Fast forward to today, and the BOE’s concerns about crowded, leveraged trades mirror those exact fears.
Retail warnings weren’t just hot air—they pointed to a broader issue: when a few funds bet big with borrowed cash, the whole system gets fragile.
The 2021 events proved retail could push back, forcing hedge funds to liquidate and eat losses.
Now, with gilts in the spotlight, it’s like history rhyming all over again.
What Happens Next? Eyes on Regulators and Markets
The BOE isn’t sitting idle—they’re part of a global push to rein in non-bank risks, and their repo reform proposals could be a game-changer.
But with hedge funds lobbying hard, implementation might drag on.
For investors, big and small, this is a cue to stay vigilant.
If retail voices from the GameStop era taught us anything, it’s that ignoring leverage bubbles can lead to nasty surprises.
Maybe this time, regulators will listen before the next squeeze hits.
What do you think—could this spark another retail uprising?
The markets are always full of surprises, but one thing’s clear: hedge fund risks aren’t going away quietly.
Also Read: Short Sellers Are Now Throwing One Another Under the Bus
