The global financial system faces significant new stability challenges as massive public debt levels collide with the increasing reliance on highly leveraged non-bank financial institutions (NBFIs), according to Pablo Hernández de Cos, the new General Manager of the Bank for International Settlements (BIS).

De Cos, who took over in July, has issued a dire warning, stating that curbing hedge funds’ ability to make highly leveraged bets in government bond markets must be a “key policy priority” for policymakers worldwide.

The central source of risk, according to the BIS chief, is the explosive growth of cash-futures basis trades, a form of “relative value” arbitrage that underpins much of the high-frequency trading in the world’s largest government bond markets, including U.S. Treasuries.

This strategy seeks to exploit tiny, temporary price differences—the “basis”—between a cash government bond (the underlying security) and its corresponding futures contract. Since arbitrage dictates that the prices of the two instruments must converge as the futures contract approaches expiration, hedge funds execute the trade by simultaneously buying the relatively cheaper security and selling the relatively more expensive one.

A typical trade involves three highly interconnected steps:

1. The Position: The hedge fund buys the physical bond in the cash market (a long position) while simultaneously selling the corresponding futures contract (a short position). The aim is to lock in the small price differential.
2. The Leverage: Because the profit margin on the basis is minuscule, hedge funds must employ massive leverage—often 30- to 60-times capital—to make the trade worthwhile. The cash purchase of the bond is financed by borrowing funds in the repurchase agreement (repo) market, using the purchased Treasury as collateral.
3. The Margin: The short position in the futures market requires the posting of margin (collateral) with a central clearing counterparty. This leverage is synthetic but exposes the fund to futures market volatility.

The Systemic Risk: When Convergence Fails

While basis trades are essential for market efficiency and ensuring accurate price discovery, their highly leveraged nature transforms them into a critical source of systemic fragility during periods of market stress.

The peril lies in the dependence on the repo market and the constant possibility of margin calls. If bond prices drop sharply or volatility spikes, the central counterparty (clearinghouse) requires the hedge fund to post immediate additional cash (margin call) to cover potential losses. Simultaneously, the counterparty lending cash in the repo market may demand a larger haircut, effectively increasing the cost of financing and constricting liquidity.

This precise mechanism was highlighted after margin calls on U.S. Treasury future trades in 2021 fueled a bout of turmoil in the world’s biggest government bond market. When volatility spiked, many hedge funds were forced into a disorderly, rapid unwinding of their massive, leveraged positions.

To meet the margin calls, they had to quickly sell the underlying cash bonds, flooding the market and exacerbating the price decline, which, in turn, triggered more margin calls in a dangerous feedback loop known as a margin spiral. The selling pressure distorted prices and severely impaired market liquidity.

De Cos provided striking evidence of the unrestrained leverage currently employed, stating that approximately 70% of bilateral repurchase agreements (repos) taken out by hedge funds in U.S. dollars and 50% of those in euros are offered at zero haircut, meaning creditors are not imposing any meaningful constraint on leverage using sovereign debt as collateral.

Against the backdrop of alarming projections that the debt-to-GDP ratio of advanced economies could soar to 170% by 2050, absent fiscal consolidation, de Cos stated that reining in NBFI leverage was a “key policy priority.” He specifically called for a “carefully selected combination of tools,” prioritizing two measures:

• Central Clearing: Implementing the greater use of central clearing so that government bond market players are treated more equally, reducing counterparty credit risk and increasing market transparency.
• Minimum Haircuts: The application of “minimum haircuts”—or required discounts—to the value of the bonds hedge funds use as collateral, thereby directly limiting the extent of their leveraged plays in a targeted manner.

De Cos concluded with a reiteration of the non-negotiable role of central banks, noting that keeping inflation in check will remain the most effective way to support debt sustainability and that, given the rapidly deteriorating sovereign creditworthiness, the need for credible monetary policy and central bank independence is stronger than ever.

Bill Ackman is plotting a major two-pronged move: raise $5 billion for a new U.S.-listed closed-end fund while taking his hedge-fund firm, Pershing Square Capital Management, public.

People familiar with the plan told Reuters the two listings are intended to launch together, a synchronization meant to give investors simultaneous exposure to the new vehicle and to the firm itself.

The closed-end fund is being structured to mirror Ackman’s hedge-fund strategy but with two important differences designed to broaden its appeal: lower fees and faster access to capital than traditional hedge funds typically allow. That combination is intended to attract a wider array of investors — from large pensions and endowments to retail buyers who normally cannot get into hedge funds. Pershing’s people have discussed offering existing investors a sweetener: recipients of shares in the closed-end vehicle would also receive free shares of Pershing Square itself as part of the launch package.

Pershing Square’s management first contemplated a U.S. closed-end listing in 2024 and even moved to list Pershing Square USA, only to pull the IPO days before it was due to begin trading in July of that year. Ackman pared back earlier, much larger ambitions, plans that once targeted as much as $25 billion in capital, and the relaunch appears to be more modest and surgical by comparison. The earlier withdrawal remains a cautionary backdrop: the new effort is smaller, more targeted, and tied to an IPO of the management firm itself.

Pershing Square manages roughly $21 billion in assets today, largely through Pershing Square Holdings, the London-listed closed-end fund that has been the public bellwether for Ackman’s strategy. That vehicle has delivered double-digit returns in recent years, performance that underpins the pitch to U.S. investors who might otherwise be wary of a hedge-fund-style product.

Pershing’s recent balance-sheet moves, including a series of high-profile equity stakes and an expanded footprint in publicly traded and private assets, feed into the narrative that the firm has scale and an investable track record.

People briefed on the plan say the new closed-end fund will aim to bring in cornerstone institutional investors to anchor the deal; Bloomberg reported that about $2 billion could come from well-known institutional backers. That anchor demand would be intended to provide confidence to broader retail and wealth-management distribution at launch, and to help the new vehicle hit scale quickly — a critical factor for a fund that seeks to replicate the concentrated, activist style of a flagship hedge fund while still offering daily navigability.

Ackman has repeatedly said he wants to convert parts of his business to more permanent, institutionally accessible formats. The rationale is straightforward: converting a large, closed investor base into publicly tradable instruments can lower funding friction, reduce redemptions, and monetize the firm’s brand and investment track record. For investors, the pitch is also mechanical and attractive — easier liquidity than private hedge funds, lower headline fees than bespoke hedge funds, and a direct line to Ackman’s concentrated investing playbook.

The plan still faces material hurdles. Market windows matter for IPOs, and people familiar with the offering warned that the structure and timing could change with market conditions. The dual-listing strategy raises complex regulatory and governance questions: how to price the incentive shares, how to align the interests of public shareholders with those who will remain in the firm’s private partnerships, and how to manage conflicts that can arise when an activist manager runs both a public vehicle and a firm with separate private clients.

Pershing has been testing many of these ideas in the London market through Pershing Square Holdings, but the U.S. listing will invite a different set of investor expectations and regulatory scrutiny.

Corporate moves earlier this year show the firm’s appetite for large, concentrated wagers. Pershing Square has pushed heavily into Howard Hughes — increasing its stake substantially via cash investments and proposals to reshape the company — a reminder that Ackman still prefers to run big, concentrated positions and, when necessary, to assume active roles in management. Those deals demonstrate the kind of assets the closed-end fund might hold, and they also explain why some investors see Pershing as a hybrid between a public investment trust and an activist merchant bank.

The public reaction to the revived IPO idea will likely hinge on three things. First, the credibility of Pershing’s track record: the London vehicle has produced strong returns in recent years, and Pershing’s managers will lean on that performance to win investor commitment. Second, fee structure and governance: investors will scrutinize whether the “lower fees” pitch is genuinely meaningful after carried interest and performance fees are baked in. And third, the optics of selling free shares of the management company: regulators and long-term investors will want to see clear disclosure on dilution, voting rights, and how management incentives align with outside shareholders.

Ackman’s public personality is also part of the calculus. He is as well known for his activist campaigns as for his social media presence, a platform he uses regularly to shape market narratives and to spotlight investments. That visibility can help distribution — he has a large following on X and other platforms — but it also brings scrutiny and magnifies reputational risk if an investment goes wrong.

If the plan proceeds, it would represent one of the higher-profile attempts in recent years to bring hedge-fund alpha to a broader investor base without the classic liquidity and fee constraints. It would also mark a rare simultaneous public offering of both a fund vehicle and the management company — an arrangement that, if successful, could reset how prominent activist managers package and monetize their businesses.

For now, Pershing Square’s spokesperson declined to comment publicly, and those familiar with the plans cautioned that the numbers and timing could shift. Sources told reporters that early-2026 remains the target window for both the closed-end fund IPO and a listing of Pershing Square Capital — provided market conditions remain favorable.

The U.S. Securities and Exchange Commission (SEC) has launched a probe into Jefferies’ involvement with the bankrupt auto parts manufacturer First Brands Group, the Financial Times reported Thursday.

The investigation, which is still in its early stages, is focused on whether Jefferies provided investors with sufficient disclosure regarding the Point Bonita fund’s exposure to First Brands’ debt, and whether internal controls at the bank were adequate to prevent conflicts of interest.

An SEC spokesperson, consistent with standard protocol, declined to comment on the existence or nonexistence of a possible investigation. But sources told the Financial Times that it remains unclear whether the probe will lead to formal allegations of wrongdoing.

First Brands’ Debt Web

First Brands Group, a significant supplier in the automotive sector, financed its operations through a highly leveraged and complex debt structure. The company relied on a mix of senior secured loans, subordinated notes, and high-yield credit facilities. Its capital stack included multiple layers of collateralized obligations, intercompany loans, and guarantees between subsidiaries, which created substantial opacity for investors and lenders.

In mid-2024, First Brands began experiencing cash flow pressures due to a combination of supply chain disruptions and lower-than-expected revenue from key auto clients. These operational issues, combined with a debt maturity schedule heavily concentrated in late 2024 and early 2025, triggered cascading defaults across several debt tranches. Senior secured lenders were partially repaid from collateral liquidation, but subordinated noteholders and other unsecured creditors suffered significant losses.

Jefferies’ Point Bonita fund had invested heavily in these instruments, particularly the subordinated and high-yield notes. Market analysts note that the fund’s exposure to these high-risk tranches may not have been fully appreciated by investors, raising questions about whether the bank adequately communicated the intricacies and vulnerabilities of First Brands’ debt structure.

Timeline of Key Events

• Early 2024: Jefferies initiates exposure to First Brands’ debt via Point Bonita fund.
• Mid-2024: First Brands begins to experience operational strain; early signs of missed payments emerge.
• July 2024: Investors report concerns regarding the fund’s exposure, as market rumors about First Brands’ debt struggles circulate.
• Late 2024: Multiple debt tranches begin defaulting; Jefferies’ fund faces significant mark-to-market losses.
• Early 2025: First Brands officially files for bankruptcy; Jefferies and other creditors attempt to recover collateral and restructure remaining debt.
• November 2025: SEC begins inquiry into Jefferies’ disclosures and internal controls related to Point Bonita fund exposure.

Market Impact and Investor Concerns

The collapse of First Brands has reverberated across the auto parts sector and the broader high-yield lending market. Investors are increasingly cautious about complex, layered debt structures that obscure true exposure, particularly when market conditions tighten or operational risks materialize. Jefferies’ share price has suffered, dropping over 12 percent this quarter and 27 percent year-to-date, reflecting heightened investor apprehension.

Analysts suggest that the SEC’s inquiry could have broader implications for hedge funds and asset managers invested in highly leveraged corporate borrowers. It may prompt heightened scrutiny of disclosure practices, especially for funds holding complex or opaque debt instruments. The outcome could influence market perceptions of risk and governance standards, particularly in the high-yield credit space.

While the investigation is still preliminary, Jefferies faces potential reputational and regulatory risks. The SEC’s inquiry may also influence broader regulatory thinking on how banks and investment funds manage and communicate risks associated with highly structured corporate debt, with potential repercussions across Wall Street’s high-yield and structured finance markets.