Are Hedge Funds Responsible For The Missing Half A Trillion In Treasury Purchases?

Tyler Durden's picture

Eric Sprott's most recent report has generated serious ripples within financial circles due to his unique interpretation of some rather nebulous data in the latest December Treasury Bulletin. Sprott raises a major question mark as to the constituency of the "Other Investors" as defined on page 48, which in his calculations, has accounted for $510 billion of Treasuries in the first three quarters of 2009. Could this be a "phantom purchaser" that is the Federal Reserve in all but name? Or is it something far more innocuous?

The table in question can be seen below:

Zero Hedge has received numerous emails with alternative interpretations of the data touched upon by Sprott, which for the most part can be summarized as follows: the phantom purchaser are just hedge funds accumulating "risk free" securities over the year.

This is an interesting theory, and, as it can be partially validated empirically, would weaken Sprott's argument if proven true. First a word about Hedge Fund LP interest allocation.

Most hedge funds have at least two constituent investment vehicles: an onshore and an offshore domiciled fund (think Cayman Islands, Isle of Man or the Bahamas). The bulk of any given fund's capital is in the offshore domiciled entity for numerous tax purposes which we are surprised the democratic administration has not gone after yet in its quest to close every imaginable tax loophole, thus "plugging" the $10 trillion deficit onslaught (no, seriously). Onshore funds only exist to provide an investment vehicle for fund investors who fail to satisfy some of the Qualified Investor criteria permissive for an "offshore" status, or merely for any investors that specifically wish to be in an onshore vehicle. This is by and far a substantial minority of all hedge fund investors, as most LPs seek way to minimize taxes at all costs, which is why they demand their capital be allocated to offshore operations. Luckily, the fact that the bulk of hedge fund operations originates, in practice, offshore (even if the investment decisions for the bulk of capital flows ultimately come from the same few offices in New York and Greenwich) provides us with a useful way of tracking fund flows, specifically by looking at the Treasury international Capital (TIC) monthly flows.

Several unique countries in the monthly TIC report have long been considered to be broadly indicative of the action within the hedge fund community: these countries are the Channel Islands and Isle of Man, the Cayman Islands,  the Bahamas, Bermuda, Netherlands Antilles, Panama, and, in some cases, the entire United Kingdom (the last is open to debate).

Zero Hedge has taken the TIC data for these hedge fund heavy regions and compiled the Treasury flow data. Again, keep in mind, offshore funds (such as those captured by the above data) account for the bulk of hedge fund activity, implying that onshore transactions represent a minority of hedge fund activity. TIC data indicates that the above group of countries (including all of the UK), was responsible for purchasing $94 billion in Treasuries (both Bills and Bonds) in the first 9 months of 2009 (incidentally October saw a major puke in USTs to the tune of $21 billion, branging the total YTD to $73 billion. Notable here is that the $94 billion is not even in the same ballpark as the $510 billion from "other investors." And even that read would be wrong: the TIC data, and what the above analysis indicates, is that the $94 billion in hedge fund purchases would actually fall in the category of "Foreign and International Buyers" meaning that only Onshore Hedge Fund vehicles could be responsible for plugging the $510 billion hole. Of course, that would mean eliminating attribution to the UK. And looking at TIC data for January thru September for the above country list and excluding the UK confirms that hedge funds are not the critical, and phantom, buyer: they only bought $13 billion through September. Add October, and hedge funds excl. the debated UK impact, and hedge funds sold a total of $15 billion in long and short-term treasuries! Hedge Funds have been net sellers of treasuries if one includes all available data.

This means that either the onshore portion of hedge funds has become a majority contributor to HF performance (extremely unlikely) or that hedge funds have been selling US Securities in their offshore funds even as they have been buying Treasuries through onshore vehicles (also highly unlikely).

This data provides preliminary evidence that Sprott is in fact right in questioning the "other investors" category: the traditional fall back of "the hedge fund made me do it", or in this case "...bought the security" just won't fly this time. We hope the US Treasury and the Federal Reserve will address Sprott's question in the near future.

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TimmyM's picture

I do not have time to research and update the numbers right now but it would be illustrative to see all catagories of fixed income issue supply since early 2007. For example how much CP and discos could have been replaced by T-bills. How much corporate and private label mtge. could have been replaced by T-notes. Did agency MBS grow? Municipal issuance?

I believe that total fixed income supply has declined.

Realityvist's picture

Can there be shenanigans going on with Fed? Possible. After all they have been giving a sloppy bj to Wall Street for a yr and more. But does this Sprott paper show that he household sector is a phantom sector? I am not convinced, there doesn't seem to any evidence for that.  Then again what do I know, I am just a layman.  But I would say this is an important issue to get answers to. I am strongly in favor of H.R 1207 (the Fed transparency), so we can find out if there are indeed any shenanigans.  Since this is just treasuries,  couldn't somebody FOIA the Treasury to find who the other investors are?

Fed fof :
The best tables to look for is L.100 pg.64 (mostly this table) and F.100 pg.18 which shows the Household sector by itself.  So now we can see changes for all financial assests from 2007 in one place.  If you look at L.209 the entries match up with L.100.  TimmyM, perhaps you may have more comments about this below.

1) The total financial assets for this household sector in Q4 07 was $50787.8B in Q3 09 it is $44415.0B
2) Treasuries: Q4 07  $257.9B   Q3 08  $429.8B  Q4 08  $272.9B Q3 09  $801.6B    Chng:  +$543.7B
3) Agency and GSE backed securities:  Q4 07 $690.2B  Q3 08 $840.2B  Q3 09  $68.0B  Chng: -$622.2B
4) Open market paper: Q4 07 $149.7B   Q3 09 $8.5B  Chng: -$141.2B
5) Corporate equities: Q4 07 $9447.4B  Q4 08 $5851.7B  Q3 09 $7388.3   Chng:  -$2059.1B

h/t smalltownlayer comment 173535 previous article for 6)
Fed fof guide
6) Here is the definition of the Household sector  from pg. 170 from the fof guide (pg.12 in pdf). It is a huge sector.

Table F.100  Households and non-profit organizations
"The households and nonprofit organizations sector consists of individual households (including farm households) and nonprofit organizations such as charitable organizations, private foundations, schools, churches, labor unions, and hospitals. Nonprofits account for about 6 percent of the sector’s total financial assets, according to recent estimates, but they own a larger share of some of the individual financial instruments held by the sector. (The sector is often referred to as the ‘‘household’’ sector, but nonprofit organizations are included because data for them are not available separately except for the years 1987 through 1996 Supplementary tables F.100.a and L.100.a in the quarterly publications of the flow of funds accounts present the latest available annual data for nonprofits.) At the end of 1997, the sector had total financial assets of more than $27 trillion, about 40 percent of the financial assets of all sectors combined."

7) Also you may note a footnote in L.100 table it says the household sector includes domestic hedge funds.  Maybe they are only a small part.
unemployed comment 173893  says the domestic hedge funds maybe off balance sheet SIVs for big banks.  I am not familiar with this, but if true, that seems shady.

8) Sprott's paper refers to pg.170 of the fof guide.  He talks about the residual calculation on that page . Now the question is why didn't he put the definition of the household sector in his paper (which is also on pg. 170), instead of referring to it as phantom?
9) Sprott's paper say the household sector bought only $15B treasuries in 08.  Technically that is correct if you look from Q4 07 to Q4 08 in net terms.   But it is misleading, there was a whole lot of turnover in 08.  If you look for Q4 07 to Q3 08 then the net is $172B.  I guess the household sector sold a lot in Q4 08. See table L.100
10) I realize this is ancedotal but I know of many people who switched to treasuries for the first time in 08, 09. Some of them large amounts.  I myself switched part of my stock assets to treasuries in  early 08.

TimmyM's picture

This issuance data shows that demand for alternatives has plunged.

Also, if the "household" sector has $44 trillion, they only need to reallocate 1.2% to Treasuries to cover your $510 billion.

Also the Fed updates these household assumptions with survey data every three years. The next survey is in 2010.

Anonymous's picture

That $44 Trillion includes everything, such as housing and real estate (which when sold, just get bought by another household).
To honestly look at this, you need to measure liquid assets, not all assets.

Realityvist's picture

$44 T is just financial assets.  The total assets are $67T. See table B.100 pg. 104 of the Fed fof. 

Realityvist's picture

Thanks for the additional link.

Anonymous's picture

May be you should request that Bill Gross address that issue. For I have a feeling that he knows a thing or two about the housewives who are sitting home waiting for the first issue to come on line to jump and buy. Heck,he even has a whole floor full of those household buyers(albeit,he dosen't talk to them because he always walk in there with an attorney).Once again, a great scientific analysis(provided the numbers you anlyzed are true,and I have no reason to doubt that).

Assetman's picture

Good point, anon.  The chances are etrememly high Mr. Gross knows exactly what is going on and who is the net "other investor" buyer.

Of course, you can just take the cue from Bill's net selling activities to conclude that-- whoever the net buyer may be-- it's dumb money.  Which leads me to believe its an agent for the government...

I sure hope someone gets Bill to speak in public about this, though...

Anonymous's picture

Oh, take off the tin-foil hats, already.

It's pretty obvious that most households usually have an extra billion or two laying around somewhere.

Like, duh.

Cursive's picture

Things are sooo upside down now that I tell people to put ON their tin foil hat.  Large-scale fraud that we once thought unimaginable in our (formerly) great republic are now commonplace.  A year ago there were many who poo-poohed the existence of the PPT.  Now, it's talked about like conventional wisdom.  I'm sure this story has it's share of disbelievers at the moment.  It'll be conventional wisdom in 6 month's time.

silence's picture

Well I did. It made a stack about 43000 feet tall (100s) which was really cool ...but then it started drawing too much attention so I traded it all in. Now I have a spiffy TreasuryDirect®  account.

Hustler Elite's picture

In the contrarian investing community it has been the same blank stares and everyone asking each other "where is this t-bill demand coming from?" for a long time now

Now the conventional investing community is starting to ask the same question.

Hopefully this goes a way towards passing HR 1207 (Fed Transparency Act) which would be a start.

Anonymous's picture

>Hopefully this goes a way towards passing HR 1207
>(Fed Transparency Act) which would be a start.

I'm just learning this stuff, so forgive my ignorance.

I agree the audit is long past due, but I think it's a win- win scenario for the bankers. For eaxmple see how the US Post Office's own documents demand international insurance valuations n SDR's:

I have a friend at FedEx who say they do this to. Now when I go to the store, purchase a present, and mail it to a friend abroad, that carrier pays me not my friend if the package is not delivered. And my receipt is in USD, not in the nonexistant SDR phantom currency.

And there is where my concern is.

I fear the audit of The Fed results in The Fed being blown up, but the game then shifts up one step to international banking for with there is, and never will be, and accountability to a citizen of any country. In other words total failure of The Fed may well finalize implementation of SDR's as a world currency. The Post Office is allready doing accounting in SDRs, and I dare say the rest fo the US gov as well.

But don't take my word for it, read what Timmy said:

And Ben Bernanke is on the board of the Bank for International Settlements, and is the Alternate Governor for the International Monetary Fund, alternate for Timmy.

So I think these guys are set to steal our money either way. Perhaps some politicians are concerned about the effect it will have on them, but I doubt Tim or Ben care. Ben and Timmy will be getting their high dollar pat of the back either way.

The only upside I see here is that people around the world would wake up to the games played at the "local level" via their own central banks, and realize a world bank is just a more effective way of doing it. If people do not wake up, and proactively refuse the screwing at that point, then we're all going to lose this war big time. So lets hope people wake up with exposure of The Fed and deny the gme being moved up one level. But that seems a lot to ask for these days.

sgt_doom's picture

EVERYONE knows it is artificial (the fed sending those trillions to foreign central banks --- random Pentagon-owned hedge funds --- and da banks (GS, JPM, MS) --- to procure those t-billsssss.

Anonymous's picture

According to the latest Fed money supply release, retail money markets have seen a draw down of $264.7 billion from January through Dec. 7 this year. Institutional money markets have been drawn down by $249.2 billion in the same time frame. Where did this money all go...especially the retail money?

Also, what if people are reallocating their portfolio. For instance, selling stocks and buying Treasury ETFs?

Also, what about new accounts opened through Treasury Direct? Where does that money show up?

The U.S. public is severly underinvested in fixed income in general relative to stocks and the latest scare of 2008 probably forced many people out of stocks and into other assets.

I know I want nothing to do with stocks and have my money heavily in Treasuries (bought in June and July), gold, silver, and spread out a bit among other commodities. I used to be 100% stocks.

I can't be the only one.

weelp's picture

The stock market continues to move up and yields on high grade corporate bonds are much higher than the yields on TBills. Why would any reasonable person want to move away from these investments and lock their money up in TBills?

I agree the rally is a joke but sometimes you gotta go where the money is. I'm not saying invest blindly because the market keeps going up but know its artificial and be smart and know when to exit. Then when the time is right, profit from the fallout and pat yourself on the back for knowing how the game is truly played. 

Anonymous's picture

you got the world on a string
a master of the universe
nobody does it better
makes me feel sad for the rest
nobody does it half as good as you

weelp's picture

I'm not implying I'm a master or some big shot investor but I can think.

Anonymous's picture


Anonymous's picture

at the last moment, the frog does indeed notice the water is starting to boil! Oh no!


Anonymous's picture

As the Sprott report indicates on p. 2, the "Other Investors" are on a pace to purchase 700% more treasuries in 2009 than they did in 2008. As Sprott rightly asks, who are they? Who had that kind of money to throw at treasuries after the disaster of '08? And what is the probability of a 700% increase YoY in this purchasing category?

Anonymous's picture

Probably Jew Run Drug cartels...

Anonymous's picture

If such exist, they'd surely be a lot smarter than to place their money in T-bills. The non-Semitic ones, well...

EconomicDisconnect's picture

And here I thought normal everyday households were buying treasuries by the boat load at a mall kiost across the nation to explain the missing buyers, silly me.  Anyone catch this one:

"Treasury removes cap for Fannie and Freddie aid
Fannie Mae and Freddie Mac receive unlimited future funds from taxpayers to stay afloat"

So the story tells us that "only" 111 Billion has been used of the 400 Billion available, yet in the usual journalistic excellence we come to expect they never ask why then extend the limit past 400 Billion if only 1/4 of that has been used?  Well I can answer:  they need more.  A lot more.  Thanks for the Christmas Eve late release of this one, just adds fuel to the conspiracy fire.

Merry Christmas and Happy New Year everyone!

drwells's picture

For all we know, these numbers are as accurate as anything that comes out of the BLS anyway.

We can probably use a somewhat simpler deductive process:

1. The Treasury and its propaganda arm, the MSM, claim that J6P is plowing hundreds of billions (no doubt the well-deserved gains from his spectacularly successful and unquestionably honest real estate speculations) into a prudent investment in Our Nation's Future, via Treasuries. They certainly aren't just being indirectly monetized by some invisible arm of our beloved Leaders. Oh heavens no.

2. Their lips are moving.

3. Therefore, they are lying.

Anonymous's picture

alex, what is "far more innicuous?".


Cursive's picture

"branging the total YTD to $73 billion."

Lulz.  Fred Thompson is a Tyler!

JR's picture

The bulk of any given fund's capital is in the offshore domiciled entity for numerous tax purposes which we are surprised the democratic administration has not gone after yet in its quest to close every imaginable tax loophole, thus "plugging" the $10 trillion deficit onslaught (no, seriously).

Unfortunately, it isn’t interested in closing all loopholes.  The Obama-run Oligarchy is a loophole for, well, the oligarchy (yes, seriously).

Anonymous's picture

Obama is running the Oligarchy? I think you have that backwards.

JR's picture

You're right. I believe I do.

Anonymous's picture

i've come to the conclusion that financial institutions like FNM, FRE, AIG, C, GS, BAC, JPM, etc. are all just conduits for the financial oligarchy to steal from the US Treasury and Main street of America. very simple really.

sgt_doom's picture

While I appreciate your thinking, Anon 174008, we should be more specific:

Goldman Sachs, JPMorgan Chase and Morgan Stanley comprise the unholy trinity -- along with their senior oligarchs among those private equities: Blackstone Group, Carlyle Group, KKR and Citadel.

Anonymous's picture

i've come to the conclusion that financial institutions like FNM, FRE, AIG, C, GS, BAC, JPM, etc. are all just conduits for the financial oligarchy to steal from the US Treasury and Main street of America. very simple really.

JR's picture
This posted by Anonymous #173881 on "Democrats Pass Temporary Debt Ceiling":

Treasury picked Christmas Eve after the close of a shortened trading day and before the markets are closed for 3 days to announce that they have removed the caps on the money available to support Freddie and Fannie for the next 3 years. Without action by Treasury, their authorization to raise the guarantees for Freddie and Fannie from the current $200 billion each would have expired on December 31. With this solution they didn't have to put out a new number and they don't have to worry about raising it again. 3 years takes them past the next Presidential election.

Can Treasury get away with kicking a December 31 expiration of an authorization from Congress out 3 years? Most of the Senators and House members who would likely oppose this measure figure to be home for Christmas and next week and not in Washington for the weekend talk shows.

Treasury also relaxed the caps on the amount of MBS Fannie and Freddie hold so they won't have to be forced sellers in the near future.

Anonymous's picture

That is the one thing that we need right now!!! Forcing F&F to unload some of their distressed assets at market prices!!

The only thing the Obama administration is done is try to keep people tethered to their over-valued and rapidly depreciating homes, which is a total SCAM!! Keeping real estate prices artificially inflated so their banking masters dont have to realize these VERY REAL LOSSES is going to bk this nation!

Mark Hanson's research is phucking incredible and very insightful into how many defaults can reasonably be expected in 2010--Read it and weep folks!!

Hey Mark---I sure miss your videos on YouTube--nobody breaks it down like you do, buddy!
(Thanks for sharing)

Anonymous's picture

It is simply getting "Jew-Wise" --The CSR

JR's picture
The Great Marginalization: COOING WITH CASH | By Carl Ginsburg | December 24, 2009  

Tis the season to be jolly, especially if you are a US corporation full up with cash. And many are. Cash reserves at US companies are at a 40-year high, with companies averaging 10 percent of market value in cash deposits or T-bills. In the health care and tech sectors, that cash reserve number is a whopping 20 percent. (All in all, a good season for the health care industry, where stocks are expected to take off as impediments to profiteering disappear—there is nothing in any of the pending health proposals to slow galloping costs.) Google CEO Eric Schmidt was effusive about his company coffers on an analyst call this week: “We love cash.”

Unlike government, there is no fiscal crisis in corporate America. Still, prudence is the order of the day. CEOs hit their mark by cutting jobs, strict inventory control-- a recalibration of P&Ls. And there is no relief in sight. If there were a “CEO confidence” survey, as exists for consumers, it would read very, very low. CEOs are well aware that the same low wage policies that brought historic profits, and bonanza bonuses, have had a double edge effect.

A scrooge is a scrooge. “Over the last several years, companies have become stingy on what they’re spending, but what we’ve seen in the last six to seven months is companies really holding onto their money,” said S&P’s Howard Silverblatt on Public Radio four days before Christmas. “We go back with the S&P indexes for decades and there’s been nothing like this….”

The latest round of pocket stuffing is at.. ho, ho, ho, the banks, as the financial sector just keeps humming along. Turns out that 2008 was just a glitch in America’s main act: making money on money In excess of $50 billion of new capital was raised to replace TARP money repaid by the banks to Treasury-- still trying to share in the glory of the Fed and its leader, Time Person of the Year, Chairman Ben. He saved the world economy, in case it missed you. And don’t the banks know it: December was the biggest month for the sale of bank stock in history…

Not far from JPMorgan Chase HQ in Manhattan are middle-class neighborhoods experiencing the worst joblessness in generations. In the northern Bronx, a middle-class area, unemployment has doubled in two years and is now 12.2 percent. Same 12.2 percent for middle class sections of Queens. Foreclosures there are rising rapidly. “Respect”? “Opportunity”?

Crime of the Century's picture

I like Cockburn's work at CP as well...

max2205's picture

Good one...another deficit slush fund added to the round II TARP


rinse and repeat. SPX 16,000

Deepthroat where the hell are you

We need a major break in this rape story

Anonymous's picture

The CIA has been purchasing most of the $510 billion of treasuries in this category. Merry Hanukkah

Anonymous's picture

Hmmm. Start at time index 3:45,

"US launders $500 billion to $1 trillion of 'dirty money' per year."

The numbers add up, as well as the premise. In this case rather than using war for funding, one uses drugs. Would that also explain 30,000 troops into Afganistan:

To help protect, package, and ship more product? And I'm not saying the troops know they are part of this, only the CIA folks need to know what is really going on.

celticgold's picture

ahemm... deep throat has his mouth full at the moment....

Anonymous's picture

Merry Christmas everyone.

hub5's picture

Let's get real.  The hedge funds are not responsible for the $500+ billion.  Bankrupt country, bankrupt states, bankrupt banks, bankrupt insurance companies, bankrupt pension funds, etc.  It's obvious the government created the money out of thin air and loaned it to the unknown entities that then purchased Treasuries in order to shore-up their bankrupt balance sheets. One big bailout ponzi scheme!  This is why the Federal Reserve and Treasury need to be audited.  Look at the volume explosion on the stock exchanges during this same period. Most of it concentrated in a few under-capitalized companies.  Now everybody except the average citizen is recapitalized!


JR's picture

Sometimes the questions are complicated and the answers are simple.-- Dr. Seuss

That’s it, Hub5, that’s it! That’s what’s keeping us awake at night, and all day, too…


"This", cried the Mayor, "is your town's darkest hour!
The time for all Whos who have blood that is red
To come to the aid of their country!", he said.
"We've GOT to make noises in greater amounts!
So, open your mouth, lad! For every voice counts!" – Dr. Seuss


"Maybe Christmas", he thought, "doesn't come from a store."
"Maybe Christmas... perhaps... means a little bit more!" – Dr. Seuss

How the Grinch (Blankfein?) Stole Christmas! (updated)




tip e. canoe's picture

Your soul is an apalling dump heap
overflowing with the most disgraceful assortment
of deplorable rubbish imaginable,
Mangled up in tangled up knots.

JR's picture

You’re a mean one, Mr. B.  You really are a mean one. You’ve got garlic in your soul, Mr. B.  You have termites in your smile. The three words that best describe you are as follows and I quote,   “Stink stank stunk.”

Thanks, Tip. It's Christmas!  Have a merry one!

Anonymous's picture

file a FOIA on Treasury. Demand more detailed ownership data.

waterdog's picture

Now all of you in the industry know that it purchased something that did not exist. I am too new to tell you what but, I am old enough to know what they say it is, it is not.

That is why it is a secrete, no one knows what it was that did not exist at the time of purchase.

Bernanke said he would not tell what it is, he really meant that he cannot tell what it is  because he does not know what it was. Remember, this guy said he did not know which CB's got the money. He may not be kidding.


AIG did not get 100%, it got 200% using smoke and mirrors.


no cnbc cretin's picture

I would agree that Eric Sprott is correct. All we have is time right now, and time will tell. And I still say 2010 will be a wake up year for the masses. It won't be pretty! Then downhill from there...