Key Takeaways
- • Charles Schwab reported margin loan balances of $188bn in the third quarter, with balances nearly doubling year on year, according to the Wall Street Journal.
- • Approximately $61bn of Schwab's margin lending is linked to long-short tax-aware strategies offered by managers including AQR and Quantinno, which use leverage and short selling to generate tax losses.
- • Assets in these strategies have reached nearly $190bn, up from just over $1bn five years ago, per estimates from Brent Sullivan of Tax Alpha Insider.
- • Fidelity suspended new account openings for the strategies in February, and Schwab subsequently raised minimums for certain new accounts from $1m to $10m and halted new enrolments and additional funding in portfolio margin accounts.
- • Total US margin debt reached $1.45tn in August per FINRA data, approaching the record $1.5tn set earlier in the summer.
Summary
Demand for tax-efficient long-short strategies offered by hedge fund managers including AQR and Quantinno has contributed to a sharp rise in US margin lending, according to a Wall Street Journal report. Charles Schwab reported margin loan balances of $188bn in the third quarter, with balances nearly doubling year on year. Approximately $61bn of that figure is linked to long-short tax-aware strategies, which borrow against a portfolio to establish additional long and short equity positions. The strategies aim to realise losses that offset taxable capital gains while maintaining broad market exposure and seeking to match or outperform equity indices.
According to estimates from Brent Sullivan of Tax Alpha Insider, assets managed through these strategies have grown to nearly $190bn, compared with just over $1bn five years ago. Schwab chief executive Rick Wurster said adoption had grown "exceptionally quickly" this year, driven by wealthy investors seeking to reduce tax liabilities.
The rapid expansion has raised concerns about leverage and operational risk. Fidelity Investments suspended new account openings for the strategies in February, sending an influx of assets to Schwab. Schwab then raised the minimum investment for certain new accounts from $1m to $10m and halted new client enrolments and additional funding in portfolio margin accounts. Wurster said the restrictions were intended to manage the strategies' operational demands and support growth sustainably. Schwab is also developing its own tax-aware long-short product, which would place it in direct competition with AQR and Quantinno.
The trend is part of a broader rise in Wall Street borrowing. Morgan Stanley, Bank of America and Goldman Sachs each reported double-digit annual growth in margin lending over the 12 months to September. Total US margin debt reached $1.45tn in August, according to Financial Industry Regulatory Authority data, approaching the record $1.5tn recorded earlier in the summer. Rising equity markets have contributed, since short sellers must post additional collateral as share prices climb. Assets in leveraged funds also exceeded $180bn in the second quarter, reflecting growing investor appetite for leveraged products.
According to estimates from Brent Sullivan of Tax Alpha Insider, assets managed through these strategies have grown to nearly $190bn, compared with just over $1bn five years ago. Schwab chief executive Rick Wurster said adoption had grown "exceptionally quickly" this year, driven by wealthy investors seeking to reduce tax liabilities.
The rapid expansion has raised concerns about leverage and operational risk. Fidelity Investments suspended new account openings for the strategies in February, sending an influx of assets to Schwab. Schwab then raised the minimum investment for certain new accounts from $1m to $10m and halted new client enrolments and additional funding in portfolio margin accounts. Wurster said the restrictions were intended to manage the strategies' operational demands and support growth sustainably. Schwab is also developing its own tax-aware long-short product, which would place it in direct competition with AQR and Quantinno.
The trend is part of a broader rise in Wall Street borrowing. Morgan Stanley, Bank of America and Goldman Sachs each reported double-digit annual growth in margin lending over the 12 months to September. Total US margin debt reached $1.45tn in August, according to Financial Industry Regulatory Authority data, approaching the record $1.5tn recorded earlier in the summer. Rising equity markets have contributed, since short sellers must post additional collateral as share prices climb. Assets in leveraged funds also exceeded $180bn in the second quarter, reflecting growing investor appetite for leveraged products.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.