Cayman-Domiciled Hedge Funds May Hold $2 Trillion in US Treasuries, Masking True Foreign Demand

Cayman-domiciled US hedge funds may hold as much as $2 trillion in US Treasury securities, according to a Federal Reserve report. This figure dwarfs the $443 billion currently attributed to the Cayman Islands in Treasury Department data. The discrepancy arises because Treasury International Capital (TIC) data fails to capture the full extent of these hedge funds' Treasury positions, instead classifying them as domestic holdings. The report estimates that TIC undercounts Cayman-based US hedge fund Treasury holdings by $1.4 trillion at the end of 2024. These funds are engaged in the basis trade, a strategy involving long positions in Treasury securities and short positions in Treasury futures. The undercounting means the total foreign holdings of US Treasuries are likely closer to $11 trillion, not the $9.49 trillion reported by the Treasury Department.