The Banks Behind the Bets
Hedge funds chasing the AI boom need more than the right stock picks. They need borrowed money, access to markets and banks willing to handle enormous positions. Wall Street’s biggest dealers are earning money supplying all three.
Through September, Goldman Sachs (NYSE: GS) generated approximately $19.2 billion in equities revenue, Morgan Stanley (NYSE: MS) produced $17.2 billion, and JPMorgan Chase (NYSE: JPM) reported $15.5 billion. Their combined haul was nearly $52 billion, covering their broader equities businesses rather than a separately disclosed AI revenue stream.
Goldman’s results reveal how the business is changing. Third-quarter equities financing revenue rose 96% to $3.37 billion, exceeding its $3.08 billion from equities intermediation. Financing was the larger revenue contributor, rather than simply an accessory to executing trades.
Through prime brokerage, banks lend against portfolios, arrange securities borrowing and provide other services hedge funds need. A transaction produces revenue when it happens. A financed position can keep generating income while it remains open.
Investors compete to identify the next AI winner. Their banks can earn money financing that competition without needing every client to pick correctly.
Size Is Part of the Product
A hedge fund building positions across American technology companies, Taiwanese chip manufacturers and South Korean memory suppliers needs more than an attractive price on one trade. It needs financing and execution that work across markets, including when prices become disorderly.
Large balance sheets, broad client networks and established trading operations reinforce one another. More clients create more opportunities to match buyers, sellers and securities borrowers. Greater financing capacity helps banks accommodate larger portfolios, making the relationship harder for smaller competitors to replicate.
Regulation has provided additional room. Revised leverage standards took effect in April, with optional adoption from January, easing a constraint on balance-sheet-intensive activities. Risk-based capital requirements still apply, so the change creates flexibility rather than unlimited lending capacity.
For bank shareholders, the attraction is a financing franchise that earns from sustained client activity. Its durability depends on how much borrowing customers maintain and what the bank earns after funding costs and risk.
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When Clients All Want Out
Recurring financing income deserves attention. Treating it like a subscription business would be a mistake.
When collateral prices fall, banks can demand more cash or reduce financing. Hedge funds may then sell positions to meet those demands, pushing prices lower and prompting further margin calls. Each lender can be protecting itself while the market as a whole becomes harder to exit.
The IMF has warned that leverage, crowded positions and simultaneous withdrawals can produce synchronized selling. Its analysis also identifies prime brokers as a channel through which hedge fund losses can reach banks.
Higher trading activity during a selloff can generate revenue, but it does not automatically offset shrinking financing balances or counterparty losses. Investors assessing these franchises should watch financing growth alongside collateral quality, client concentration and returns on the capital committed.
A bank does not need its customer’s AI thesis to be right to collect financing income. It still needs enough collateral, or a solvent customer, when that thesis goes wrong.
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