The International Monetary Fund (IMF) has warned that a “concentration of vulnerability has built up” which poses a potential risk to wider financial stability, given that a small group of hedge funds now accounts for most short positions in the U.S. Treasury futures market.

The IMF’s Global Financial Stability Report notes that “Some of these funds may have become systemically important to the Treasury and repo markets, and stresses they face could affect the broader financial system.”

Leveraged hedge funds have increased their leveraged short positions in U.S. Treasury futures to profit from the basis trade, which takes advantage of the small price differences between cash Treasuries and their underlying futures counterparts.

According to the IMF report, as of December, approximately half of the US 2-year Treasury futures short positions were held by eight or fewer dealers. While the study does not name individual funds, Bloomberg reported in December that ExodusPoint Capital Management, Millennium Management, and Citadel had all employed the wager.

The IMF acknowledges that basis trades provide market liquidity, but it is concerned about the danger posed by present concentrated positions, given that funds have become so important to the Treasury and repo markets that they are now virtually too large to fail.