⚠ When Hedge Funds De-LeverModerate threat

Morgan Stanley (MS) — threat to the moat

Morgan Stanley's equity record is built on hedge-fund borrowing, which is repaid fastest exactly when markets fall.

The equity record rests on client balances, and balances are borrowed money that can be repaid quickly. Morgan Stanley's own risk factors say concentration of risk "may reduce revenues or result in losses in our market-making, investing, underwriting (including block trading) and lending businesses (including margin lending)"1.

Equity revenue, Q2 ($M)3,721Q2 20256,300Q2 2026Morgan Stanley Q2 2026 earnings release
Up 69% in a year, and reversible.

A prime broker lends against securities that can fall. When they do, clients sell, balances shrink, and financing revenue falls at the same time as trading revenue. The firm adds that if it holds a concentrated position larger than competitors hold, it "may incur larger losses"2.

The history of the line shows the swing. Equity revenue was $11,435 million in 2021 and fell to $9,986 million by 202334 before its recent rise.

The same risk factor adds that the firm commits "substantial amounts of capital" to these businesses, "which often results in our taking large positions"5. The larger the prime balances, the larger the positions that must be unwound in a stressed market, and the equity desk's 2025 record was built on balances at their highest.

This is a cyclical risk inside the one business that has grown fastest. The first quarter of year-on-year decline in equity revenue will show how quickly the balances unwind; a drop above 30% in a single year would say the record was leverage rather than franchise.

References
  1. ReportedMorgan Stanley's own risk factors say concentration of risk "may reduce revenues or result in losses in our market-making, investing, underwriting (including block trading) and lending businesses (including margin lending)".
    Morgan Stanley Form 10-K for fiscal 2025 - Item 1A risk factors, competition and legal proceedings. — FY2025 · publ. 19 February 2026 · source ↗
  2. ReportedThe firm adds that if it holds a concentrated position larger than competitors hold, it "may incur larger losses".
    Morgan Stanley Form 10-K for fiscal 2025 - Item 1A risk factors, competition and legal proceedings. — FY2025 · publ. 19 February 2026 · source ↗
  3. ReportedEquity revenue was $11,435 million in 2021 and fell to $9,986 million by 2023 before its recent rise.
    Morgan Stanley Form 10-K for fiscal 2025 - segment results, revenue lines and regional net revenues. — FY2025 · publ. 19 February 2026 · source ↗
  4. ReportedEquity revenue was $11,435 million in 2021 and fell to $9,986 million by 2023 before its recent rise.
    Morgan Stanley Form 10-K for fiscal 2023 - segment results for 2021-2023, Wealth Management metrics for 2021-2023, the block-trading settlements, and 2023 charges. — FY2023 · publ. February 2024 · source ↗
  5. ReportedThe same risk factor adds that the firm commits "substantial amounts of capital" to these businesses, "which often results in our taking large positions".
    Morgan Stanley Form 10-K for fiscal 2023 - segment results for 2021-2023, Wealth Management metrics for 2021-2023, the block-trading settlements, and 2023 charges. — FY2023 · publ. February 2024 · source ↗
Sources
Generated September 26, 2026