The Federal Reserve recently said

The Federal Reserve recently said hedge funds in the Cayman Islands are likely to hold about $1.85 trillion worth of Treasurys. That’s more than four times as many as the U.S. Treasury estimated. The cause of this discrepancy stems from a complex trading strategy called basis trading.

Here’s how it works: hedge funds buy real government bonds and bet on government bond futures at the same time. This is because the prices of the two prices sometimes don’t match perfectly, because if they do, they can make a profit. To buy all of these bonds, hedge funds borrow cash through the repo market (a short-term loan system with government bonds as collateral).

But there’s a catch. When government bonds are handed over to another institution or repossessed (i.e., reused as collateral by another institution), it’s hard to figure out who actually owns government bonds. So you don’t see a lot of these bonds in official data. That’s why hedge funds actually seemed to have only $423 billion, even though they had about $1.85 trillion.

This problem is important because if there is a major market shock and all the funds try to clean up the transaction at once, there can be serious confusion in the government bond market. Prices can fluctuate significantly, funds can be depleted, and borrowing costs can skyrocket. Furthermore, the Fed has a hard time managing interest rates and liquidity in part because it does not have a clear picture of how much risk and leverage exists.