Growing demand for tax-efficient long-short investment strategies offered by hedge fund managers including AQR and Quantinno has contributed to a sharp increase in US margin lending, with Charles Schwab reporting borrowing balances of $188bn in the third quarter, according to a report by the Wall Street Journal.

Schwab's margin loan balances nearly doubled year on year, including approximately $61bn linked to long-short tax-aware strategies, which use leverage and short selling to generate tax losses while seeking to match or outperform equity indices.

Assets managed through these strategies have surged to nearly $190bn, compared with just over $1bn five years ago, according to estimates from Brent Sullivan of Tax Alpha Insider.

The strategies typically involve borrowing against an investment portfolio to establish additional long and short equity positions. This creates opportunities to realise losses that can offset taxable capital gains, while maintaining broader market exposure.

Schwab chief executive Rick Wurster said adoption of the strategies had grown "exceptionally quickly" this year, driven by demand from wealthy investors seeking to reduce their tax liabilities.

However, the rapid expansion has raised concerns over the leverage and operational risks associated with the strategies, prompting major custodians to restrict new investments.

Fidelity Investments suspended the opening of new accounts for the strategies in February, leading to an influx of assets at Schwab.

Schwab subsequently introduced its own restrictions, raising the minimum investment for certain new accounts from $1m to $10m and halting new client enrolments and additional funding in portfolio margin accounts.

Wurster said the restrictions were intended to manage the operational demands of the strategies and ensure the firm could support their growth sustainably.

Schwab is also developing its own tax-aware long-short investment product, potentially placing it in direct competition with established hedge fund managers including AQR and Quantinno.

The growth in tax-aware strategies has coincided with a broader increase in borrowing across Wall Street. Morgan Stanley, Bank of America and Goldman Sachs all reported double-digit annual growth in their margin lending businesses in the 12 months to September.

Total US margin debt reached $1.45tn in August, according to Financial Industry Regulatory Authority data, approaching the record $1.5tn recorded earlier in the summer.

Rising equity markets have contributed to the increase, as short sellers are required to post additional collateral when share prices rise, potentially increasing their borrowing requirements.

The expansion also reflects growing investor appetite for leveraged investment products, with assets in leveraged funds exceeding $180bn during the second quarter.