Hedge fund borrowing triples since 2020, enriching banks

Hedge fund borrowing from banks has tripled since 2020. Lending to the largest trading firms has become one of the fastest-growing businesses on Wall Street, according to a Financial Times report published Thursday, October 8. Revenues from equity and fixed-income prime brokerage, two of the main ways banks lend to hedge funds, are expected to reach $47.9bn this year, according to an analysis by industry data firm Coalition Greenwich.ft

Firms such as Citadel, Millennium Management and Point72 rely more and more on bank lenders to finance their trading strategies. Hedge fund executives say Goldman Sachs The Goldman Sachs Group, Inc. ↗ 1.44% and Morgan Stanley ↗ 1.38% are the biggest players in the business, followed by JPMorgan Chase ↗ 0.47%.hedgeweek

A recurring revenue engine

Rules introduced after 2008 limited banks' own speculative trading. Much of that risk-taking moved to hedge funds and specialist firms. Banks kept a central role by supplying the financing and securities lending those firms need. Banking executives say servicing one major hedge fund or proprietary trading firm can bring in as much as $200m a year after trading costs. Coalition Greenwich expects prime services to make up about 38% of banks' equities revenues this year, up from 10% in 2005.hedgeweek

The gains have shown up in recent results. Prime services revenue at the 12 largest banks worldwide rose 51% in the first half of 2026, Financial News reported in August. In the second quarter, Goldman reported record prime brokerage revenue. Federal Reserve data shows domestic hedge funds' secured borrowing through prime brokers at about \$843bn in the first quarter of 2026.fnlondon+2

Competition is getting tougher as Citigroup ↗ 1.22% and Bank of America ↗ 1.32% expand, and European lenders such as BNP Paribas, Barclays ↗ 0.00% and ABN Amro push for a bigger share. The biggest clients have used that competition to win better terms. Financing commitments that used to last about two weeks now run up to six months for the most sought-after funds.hedgeweek

Regulators watch leverage

The business is concentrated among a few clients. Goldman Sachs found that the largest multi-manager funds accounted for more than a third of industry trading activity last year, even though they manage less than a tenth of total assets. In July, the Bank of England said prime brokerage balances had risen by about 40% over the previous year. Federal Reserve data shows the 50 largest hedge funds borrow about \$3 for every \$1 of assets they manage, and the 15 largest borrow about \$11. These figures do not include leverage built into derivatives.hedgeweek

Longer financing commitments can make it harder for a bank to demand more collateral when markets turn. Banks also cannot see a client's full leverage when it spreads its business across several prime brokers. That was the problem behind the collapse of Archegos Capital Management in 2021, which cost Credit Suisse \$5.5bn. More recently, banks had lent billions of dollars to the AI-focused hedge fund Situational Awareness before it ran into trouble. Citadel stepped in and bought its portfolio of public stocks, which helped avoid a disorderly sell-off.hedgeweek

Prime brokers say their risk controls are stronger than before. Regulators still warn that the race for the most profitable clients could push banks to loosen their standards.hedgeweek