When a bank runs out of room to lend to hedge funds piling into the most crowded trade on the planet, there are two options: stop lending, or find more room. Barclays found more room…
According to a Bloomberg exclusive published Tuesday, Barclays (BARC) executives wanted extra capacity to lend more aggressively to hedge fund clients as Asian AI stocks went vertical earlier this year. The fix: the bank’s macro rates traders ended up lending part of their own capital allocation to the prime financing business through an internal auction. The reason they had to: over the summer Barclays had reached its maximum limits on how much financing it could extend to hedge fund clients in Asia. Bloomberg’s verdict: Barclays and its peers are “finding ways to meet demand, despite bumping up against internal constraints.”
In other words, the internal risk limits did their job, flagged that the bank had lent enough… and the bank responded by moving the goalposts.
“Disciplined”… Right Up To The Limit
The pitch inside Barclays, per Bloomberg’s sources, was simple: allocate more balance sheet to higher-returning businesses like prime brokerage (housed in the global markets unit run by Adeel Khan) given the “huge growth” expected in Asian tech stocks. Rates traders, whose returns on balance sheet don’t look nearly as sexy as financing Korean memory stocks at peak euphoria, became the donors.
Barclays’ official line:
“We deploy our investment bank balance sheet dynamically, responding to client opportunities while maintaining a disciplined approach to risk and returns.”
Translation: we found a client opportunity, and we deployed dynamically. Meanwhile, the “disciplined” part kicked in only after the limit was hit.
Regular readers will recall that the Bank of England had already started poking around exactly this corner of the market just as the AI trade was cracking in July.
And as we noted when regulators finally found their situational awareness (Sep 24), the BoE is specifically looking at the rapid growth of London prime brokers financing Asian equities this year, after names like SK Hynix went vertical. London prime brokers financing Asian equities… it’s almost as if someone had a specific bank in mind.
