Hedge fund borrowing is booming, and Wall Street banks are collecting the profits. According to a Financial Times report, what hedge funds owe their banks has tripled since 2020. As a result, prime brokerage has become one of the most lucrative corners of the Street. The business involves lending to and serving big trading firms.
Hedge fund borrowing by the numbers
Citadel, Millennium Management and Point72 increasingly lean on lenders. In fact, they use that money to finance their trading strategies, Hedgeweek reports in its summary of the FT piece. The payoff for banks is big. Prime brokerage revenue across equities and fixed income is expected to hit $47.9 billion this year, per Coalition Greenwich.
Bank executives told the FT that serving one major hedge fund or proprietary trading firm can bring in as much as $200 million a year. That figure comes after trading costs. As a result, prime services should make up about 38% of banks’ equities revenue this year. That compares with 10% back in 2005.
Separately, Treasury Department data cited by the New York Times show hedge funds had borrowed nearly $3.7 trillion from banks by midyear. That is the highest in more than a decade. It is also roughly triple the 2020 level, according to Yahoo Finance’s summary of the Times report.
How much debt the biggest firms carry
Fed data show the 50 largest hedge funds borrow about $3 for every $1 of assets they manage. For the 15 largest, however, the figure jumps to roughly $11 per $1. Even so, those numbers leave out leverage hidden inside derivatives.
Include derivatives, and the picture gets wilder. One banking executive estimated the largest funds could carry effective leverage of 20 to 25 times. Another put market makers as high as 40 times. Those are anonymous estimates, so treat them as rough signals rather than hard data.
The biggest multi-manager funds also punch far above their weight. Goldman Sachs says they drove more than a third of industry trading activity last year. Meanwhile, they managed less than a tenth of total assets.
Why regulators are uneasy about the prime brokerage boom
Banks can’t see the whole picture, because large funds spread their business across several prime brokers. No single lender knows a fund’s full leverage. The Bank of England said in July that prime brokerage balances had climbed about 40% over the previous year.
The IMF is also sounding the alarm. A new chapter of its Global Financial Stability Report argues that hedge funds improve market functioning but can also amplify stress. Leverage can force funds to pull back when markets are least able to absorb their selling. The fund urges countries to track hedge fund leverage and interconnectedness more closely. Still, worries about leverage are not limited to hedge funds. Our look at crypto market risks and financial stability shows similar fears in digital assets.
This summer offered a live example. Situational Awareness, an AI-focused hedge fund, nearly collapsed. Executives reportedly pressed lenders to raise leverage to 10 times investor capital, up from 4 times. Frank Smets of the Bank for International Settlements called it a reminder. In his view, forced selling by leveraged funds could spark a wider selloff.
The repo market and the Treasury basis trade
A big chunk of this borrowing runs through the repo market. A New York Fed analysis, as summarized by Universe News Network, shows hedge fund repo borrowing growing from about $400 billion in 2013. By late 2025, it had reached $3.0 trillion. The Treasury basis trade is the largest source of that demand. Its unwinding in March 2020 helped trigger dysfunction in the Treasury market.
That link makes demand at events like the U.S. Treasury’s 10-year note auction worth watching. Note also that the $3.7 trillion and $3.0 trillion figures measure different things. One tracks bank borrowing, the other repo borrowing, so they can’t be added together.
What to watch next as hedge funds borrow more
Banks report third-quarter earnings in mid-October. Prime brokerage and equities financing revenue will show whether the boom is still rolling. Regulators, meanwhile, are asking whether growing exposure to non-bank lenders and borrowers creates weak spots in the wider financial system. With the IMF’s new warning on the table, expect that debate to heat up. For another sign of how Wall Street is wrestling with new risks, see our report on the emergency meetings AI has sparked in finance.
