Hedge funds cut CDS positions as basis trades diminish

Hedge fund purchases of credit default swaps (CDSs) have waned in response to diminishing opportunities in CDS basis trades.

The combined gross notional of all CDS contracts traded with dealers peaked in mid-2014 at $1.1 trillion, and has since fallen precipitously, to $375 billion at end-2017. 

Hedge funds have been net buyers of credit protection, particularly in single-name CDS, throughout this period. The Bank for International Settlements (BIS) posits this is likely because of the