I've been reading about this. You know what this tells me? Most of the big hedge funds even quant ones use very very SIMPLE strategies. Basis trade is one of the simplest arbtirage strategies. They just use a lot of leverage 20x to generate returns. Retail daytraders trying to figure out how to capture price movements intraday is way harder problem from a mathematical and modeling perspective. No wonder most retail traders lose. Besides being undercapitalized, poor risk management, lack of technology, etc. etc. etc. Price pattern recognition with proper risk management is a non-trivial thing. The only fund that I know that have done that successfully is Rentech. The rest of so called quant hedge funds apply very simple arb strategy with leverage.
The thing is that the trading in the basis spread is what is moving the market. Retail traders trading the chart patterns (price action) are largely uninformed about the trading happening in the basis spread.
Retail traders NOT know what a basis trade does not mean the problem they are trying to solve -identifying and capturing price patterns- is an easy problem. I would submit that is a problem that's 100x harder to "solve" analytically/mathematically than arbitrage trades. This is why Rentech hires the best minds in math, physics, astronomy, compsci, etc. to do research. They are the only quant hedge fund I know that does deep research into price patterns. Arb trades are idiotically simple once you identify the arb. Just buy one and sell the others(or short). I used to arb cryptos. It was a trivial. Of course, that trade stopped working once the window of opportunity closed. Anyhow. Long story.
I Hate this shit. I do understand why we need to bail our airlines, car manuf and alike. But this is total BS to bail out these guys. Essentially they lever up, rake in billions in good times and then cry for help when trades go against them.
Once you are past the raw basics, treasury futures basis trades are not simple at all. Especially so in ultra-long bond where there are additional tricky features to the delivery process. This said, I recon nobody was stressing these positions for a 10% hike in repo rates and people got caught with their pants down. True about most of these trades, nobody expected this type of dislocations (reminder to everyone that only the paranoid survive in this business). Those of us who avoided these trades and had the ammo actually put capital to work, cause "other peoples pain is my gain". The article is just a collection of random conjectures. For example, P72 is listed as a fund that has been "bailed out" and says it took a hit from Cubist. Cubist is a quant equity shop, they had zero bond basis exposure. P72 had some bond basis exposure, but most of the losses came from the other arbitrage positions, primarily in equities (p72/Cubist information I can know for a fact). Millennium actually unwound their bond basis and on/off-the-run positions when they turned sour and BAM also cut their exposures several weeks ago (1st hand information). For a multi-manager with a pass-through structure, down 5% on the year is very bad. Not everyone got "bailed out" as we are seeing closures of both pods and standalone funds all over the place. Anyway, enumerating what's wrong with any ZeroHedge article is a waste of time, but it makes for an entertaining read.
My understanding might be wrong, but AFAIK the problem was inability to secure funding for their positions (via repo), not anything having to do with the value of those positions, or erosion of capital/margin due to losses. Nobody wants to see wall street types "bailed out" but arbitrage serves a legitimate and useful market function, while providing liquidity against government bonds is perhaps the most basic task of a central bank.