Summary: Hedge funds have grown to become a major presence in Canada’s government bond auctions, acquiring roughly 30% to 50% of offerings at auction, a senior debt management official said at a London conference. The official reported that hedge funds were largely absent from the market ten years ago, described the shift as the "biggest trend" in the market, and said policymakers' worries have become more nuanced after observing hedge fund behaviour over the past year.
Speaking at a Financial Times conference in London, Matt Emde, director general at the Canadian Department of Finance, laid out how hedge funds have altered the mechanics of the government bond market. Emde said their participation has surged to the point where they now acquire between 30% and 50% of debt sold at auction.
"It is the biggest trend in our markets... It’s huge," Emde said, noting the contrast with a decade ago when hedge funds were largely absent from Canada’s market.
According to Emde, Canadian authorities were more anxious about hedge fund activity roughly a year ago, but their assessment has shifted. "A year or so ago we were fairly concerned, but our views have evolved, and they’re more nuanced now," he said. "I think what we’ve seen is that hedge funds are not fast, flighty money." The official described a recent period of observation that led to a recalibration of regulatory concerns.
Emde explained that hedge funds have assumed some functions traditionally performed by dealers. They often buy large quantities of bonds close to auction dates, hold those positions briefly, and then sell into the secondary market, which provides liquidity to other market participants.
Despite the evolving view, Emde warned that risks remain. "There’s clearly a concentration risk," he said. He added that a relatively small class of highly active investors could move together and that such coordinated movements - or herd behaviour - could be negative for the market.
He also noted that hedge funds have become dominant in European bond markets as well, indicating the change is not confined to Canada.
Contextual note: The remarks were made at a public conference in London and reflect the official's assessment based on recent market behaviour and observation over the past year.