U.S. Banks' Hedge Fund Exposure Doubles to $4.5 Trillion in Four Years, Deleveraging Risk Looms

According to a report by Bloomberg strategist Simon White released on July 2, U.S. banks' risk exposure to hedge funds and shadow banking institutions has surged from $2 trillion to approximately $4.5 trillion over the past four years. Average hedge fund leverage has roughly doubled since 2022, with leverage built into Treasury basis trades (buying spot bonds while shorting futures) alone estimated at $2.4 trillion.

White warned that should market conditions trigger a deleveraging event, banks could shift from acting as "shock absorbers" to "amplifiers," potentially sparking a vicious feedback loop of forced liquidations and margin calls. The leverage is heavily concentrated in high-volatility AI stocks financed through banks' principal brokerage operations, with collateral and financing costs at historically elevated levels near previous market peaks, according to the report.