After Trump ignited a global tariff storm, the Bank of England warned that the risk of further significant market adjustments remains very high. The Bank of England's Monetary Policy Committee explicitly stated in the minutes of the meetings held from April 4 to April 8, released on Wednesday: Several hedge funds are facing "significant margin calls." Although these funds are currently able to meet margin requirements on time, the danger is approaching, and the overall global risk environment is deteriorating." The Bank of England also emphasized that uncertainty is increasing, and both the probability and consequences of bad events are amplifying. So, what exactly is the Bank of England worried about? The "Leverage Bomb" of Hedge Funds In fact, as early as last year, the Bank of England conducted systematic stress tests covering investment banks, insurance companies, central counterparties, hedge funds, asset management firms, and pension systems. The results showed that hedge funds, asset management companies, and pension funds may be inadequately prepared during a crisis, making them vulnerable to shocks. Some hedge funds proactively reduced their positions before Trump announced new tariffs, resulting in relatively minor impacts during the volatility, but this did not alleviate the Bank of England's concerns. The Bank of England specifically warned that the use of leveraged trading strategies in the UK government bond market is on the rise, posing potential risks. Data shows that the net repurchase leverage position of UK hedge funds in the government bond market surged from £4 billion at the beginning of 2024 to £61 billion by March 2025, reaching the highest level since 2017, indicating a very high degree of leverage usage. The most typical example is the so-called "basis trading," which involves arbitraging the price difference between government bond spot and futures. This strategy yields stable returns in a calm environment, but once the market experiences severe volatility, it may be forced to close positions, creating a chain reaction. In fact, the recent significant fluctuations in U.S. Treasury bonds are partly due to hedge funds unwinding basis trades, meaning they simultaneously closed both spot and futures positions. The UK government bond market also faced similar shocks. The Bank of England warned that if these concentrated high-leverage positions are forced to close quickly, price volatility will be amplified, potentially triggering financial stability risks. Moreover, the Bank of Canada and the European Central Bank have also issued similar warnings, indicating that this is a common hidden risk facing the global financial system. The "Exit Dilemma" of Private Capital If the collapse of hedge funds is the first round of damage, then the turbulence of private capital is the second wave of impact. The Bank of England has long been concerned about the large number of "hidden risk companies" in the UK market that are supported by private equity. Most of these companies rely on high leverage for expansion, which allows for rapid growth in favorable market conditions, but once faced with economic headwinds, risks such as cash flow tightness, debt defaults, and even layoffs will follow. For example, the day after Trump announced tariffs, the stock prices of major global private equity firms collectively plummeted. KKR and Ares Management fell by 15%, marking the largest single-day drop in history. Other international private equity giants such as Apollo, Carlyle, Blackstone, and Brookfield also saw widespread declines. Behind these sharp declines is a rapid escalation of market concerns about the "exit difficulties" in the private equity industry At the beginning of the year, the private equity industry was still hopeful that Trump would drive a wave of mergers and acquisitions (M&A) and IPOs, opening up an exit window for assets. However, tariff policies have exacerbated economic uncertainty, undermining confidence in M&A and new stock issuances, which may slow down M&A activities, forcing the exit window for private equity investments to be delayed. In fact, well-known companies preparing to go public, such as the "Swedish payment unicorn" Klarna and the "American second-hand ticket platform" Stubhub, have suspended their IPO plans. Even more concerning is that about 10% of private sector employment in the UK relies on companies supported by private equity. If systemic risks occur in the current environment, the consequences could be significant. The Bank of England has long warned about the opacity of valuations and governance structure flaws in the private equity market. It now further points out: "Global uncertainty and rising risk premiums will lead to tighter financing conditions for companies, suppressing investors' exit windows. In an already sluggish IPO market, these vulnerabilities may amplify the impact on highly leveraged companies, undermine confidence, and ultimately jeopardize financial stability in the UK."