Key Takeaways
- • The five largest U.S. investment banks have already surpassed last year's record equity trading revenue by about $7 billion, according to a CNBC analysis, with $67 billion in equities revenue through September.
- • Goldman Sachs, JPMorgan Chase and Morgan Stanley together generated $52 billion, or nearly 80% of the top five's equities revenue, through September.
- • Goldman Sachs' equities revenue grew 57% this year to more than $19 billion, while its equities financing surged 96% last quarter.
- • Hedge fund assets reached $13 trillion earlier this year, up from $4 trillion in 2013, according to IMF estimates, with leverage driving most of that growth.
- • Hedge funds pared leverage in the week before Oct. 22, with net leverage at a one-year low, even as tech made up nearly a quarter of Goldman's hedge fund client holdings as of Oct. 15.
Summary
The five largest investment banks have already exceeded last year's record equity trading revenue by roughly $7 billion, a CNBC analysis found. Goldman Sachs, JPMorgan Chase and Morgan Stanley accounted for $52 billion of the group's $67 billion in equities revenue through September, nearly 80% of the total. Goldman Sachs led the group, with equities revenue up 57% this year to more than $19 billion, ahead of Morgan Stanley (about $17 billion) and JPMorgan (about $15 billion). Bank of America and Citigroup reported totals in the single-digit billions.
Looser leverage rules are enabling banks to expand prime brokerage business with hedge funds, which are seeking financing for their AI investments. Goldman Sachs reported a 96% surge in equities financing last quarter. On JPMorgan's third-quarter earnings call, CFO Jeremy Barnum said an analyst's description of "insatiable demand for capital" felt about right.
The appetite carries risk. The IMF estimated this month that hedge fund assets reached $13 trillion earlier this year, up from $4 trillion in 2013, with most of the growth driven by leverage that the IMF warned could increase market volatility under stress. JPMorgan CEO Jamie Dimon told CNBC in August that margin debt was the highest it has ever been, pointing in part to hedge funds and prime brokerage.
Hedge funds reduced some leverage last week, selling tech stocks at the fastest pace in at least a decade, according to Goldman Sachs. Net leverage fell to a one-year low, though tech still made up nearly a quarter of Goldman's hedge fund client holdings as of Oct. 15.
The summer collapse of Situational Awareness illustrated the danger. Its highly leveraged AI trades failed during July's chip-stock rout, and smaller hedge funds suffered alongside it. The funding banks absorbed those losses, and the pain has so far remained largely with hedge funds rather than the banks, though a broader AI downturn could change that calculus.
Looser leverage rules are enabling banks to expand prime brokerage business with hedge funds, which are seeking financing for their AI investments. Goldman Sachs reported a 96% surge in equities financing last quarter. On JPMorgan's third-quarter earnings call, CFO Jeremy Barnum said an analyst's description of "insatiable demand for capital" felt about right.
The appetite carries risk. The IMF estimated this month that hedge fund assets reached $13 trillion earlier this year, up from $4 trillion in 2013, with most of the growth driven by leverage that the IMF warned could increase market volatility under stress. JPMorgan CEO Jamie Dimon told CNBC in August that margin debt was the highest it has ever been, pointing in part to hedge funds and prime brokerage.
Hedge funds reduced some leverage last week, selling tech stocks at the fastest pace in at least a decade, according to Goldman Sachs. Net leverage fell to a one-year low, though tech still made up nearly a quarter of Goldman's hedge fund client holdings as of Oct. 15.
The summer collapse of Situational Awareness illustrated the danger. Its highly leveraged AI trades failed during July's chip-stock rout, and smaller hedge funds suffered alongside it. The funding banks absorbed those losses, and the pain has so far remained largely with hedge funds rather than the banks, though a broader AI downturn could change that calculus.
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