Griffin, 55, called the recent hand-wringing over the trade by the SEC, Treasury Department and BoE “a regulatory jihad,” instead arguing that hedge funds are actually forces for good, providing liquidity and saving taxpayer money.

Should another Treasury market hiccup occur, the Fed — having learned from the early days of the pandemic — will probably act faster and in a more targeted way, said Rob Robis, chief strategist for BCA Research’s global fixed income strategy.   

But further central bank action may embolden traders to be more aggressive.

“It incentivizes them to double-down on trades” because they assume the Fed will backstop them, said Medley Global Advisors economist Michael Redmond, who previously worked at the Treasury Department. Risk-taking could get so out of hand that intervention might not be enough or come too late, he said.  

At least one large prime broker has set limits on how much more leverage it will provide to multistrats and macro hedge funds, a person with knowledge of the matter said. Other lenders are watching the borrowing of these money managers more closely.

The basis trade isn’t the only highly leveraged wager to cause trouble. Wagers on stocks being added to or removed from equity indexes —- known as index rebalancing — fueled losses for hedge funds in 2020 and 2022 because of crowding. One fund manager estimated that a dozen firms were doing the trade in 1998, compared with at least 50 in recent years — including various pods at the big multimanagers — before deteriorating returns drove traders away.    

There’s more crowding across equities, too.

Multimanager firms now hold 30% of the gross market value in US stocks, up from 27% last year, largely because of more leverage, Goldman Sachs said in its September report, adding that they now have “a larger market footprint” than traditional stock-picking hedge funds.

Of the $90.7 billion that Citadel held in US stocks at the end of September, 93% was in shares Millennium also holds, according to a Bloomberg analysis of regulatory filings.

Firms are locking up capital for longer — in some cases as many as five years — something investors fear is incentivizing traders to acquire securities that are harder to value and unload in a crisis. Clients point to the high demand for distressed-debt teams at multistrats as proof of this migration toward harder-to-sell assets.