The growing popularity of tax-efficient investment strategies is driving a significant surge in margin borrowing, according to recent reports from major financial firms. Charles Schwab revealed on Thursday that its margin loan balances reached approximately $188 billion in the third quarter, nearly doubling compared to the same period last year. A major factor behind this increase is the widespread adoption of long-short tax-aware strategies, which aim to deliver market-beating returns while minimizing investors’ capital gains tax liabilities.

Schwab’s margin balance included about $6 billion tied to long-short strategies, the company disclosed. CEO Rick Wurster noted that demand for these approaches has accelerated rapidly this year, reflecting clients’ strong interest in reducing tax expenses. “Saving money on taxes is something our clients love to do,” Wurster said, adding that such demand is expected to continue.

Margin debt, or borrowing by investors from brokerages to purchase securities, has remained near historic highs. Supporting this trend, Bank of America and Goldman Sachs each reported double-digit growth in securities-based loans—which encompass margin debt and other loan types—over the past year. Morgan Stanley also indicated its margin portfolio expanded by more than 10 percent in the same timeframe.

Long-short tax-aware strategies, popularized by hedge funds such as AQR and Quantinno, now manage nearly $190 billion in assets, a steep increase from just above $1 billion five years ago, according to estimates from Brent Sullivan of Tax Alpha Insider, a tax-conscious investing publication. These strategies attempt to outperform benchmarks by taking leveraged positions both long and short, while generating tax losses to offset gains, thereby improving after-tax returns.

Fidelity Investments played a significant role in the rise of this approach by enabling investors with smaller account balances to participate. However, the demand became so intense that Fidelity paused new account openings for long-short tax-aware strategies in February. This restriction redirected a wave of new assets into accounts at Schwab, prompting the firm to introduce its own limits last month. Schwab raised minimum investments for certain new accounts from $1 million to $10 million and stopped accepting new clients or funds in portfolio margin accounts.

The use of leverage inherent to these strategies raises concerns about increased risk on brokers’ balance sheets, according to individuals familiar with the matter. The restrictions implemented by Schwab and Fidelity have the potential to slow the overall expansion of the strategy, though other custodians are beginning to accommodate investors interested in similar products.

Wurster emphasized the importance of managing growth prudently to maintain operational stability, stating, “It was important to us to throttle growth for a period of time to make sure that we can support this from an operational standpoint.” He further revealed that Schwab is developing its own long-short tax-aware product designed to offer sustainable, manageable exposure to the strategy over the long term. This development would position Schwab as a direct competitor to established firms like AQR and Quantinno in the growing market for tax-optimized, leveraged investing approaches.