Branched fatty acid (FA) esters of hydroxy FAs (HFAs; FAHFAs) are recently discovered lipids that are conserved from yeast to mammals^,. A subfamily, palmitic acid esters of hydroxy stearic acids (PAHSAs), are anti-inflammatory and anti-diabetic^,. Humans and mice with insulin resistance have lower PAHSA levels in subcutaneous adipose tissue and serum. PAHSA administration improves glucose tolerance and insulin sensitivity and reduces inflammation in obesity, diabetes and immune-mediated diseases^{,, , –}. The enzyme(s) responsible for FAHFA biosynthesis in vivo remains unknown. Here we identified adipose triglyceride lipase (ATGL, also known as patatin-like phospholipase domain containing 2 (PNPLA2)) as a candidate biosynthetic enzyme for FAHFAs using chemical biology and proteomics. We discovered that recombinant ATGL uses a transacylation reaction that esterifies an HFA with a FA from triglyceride (TG) or diglyceride to produce FAHFAs. Overexpression of wild-type, but not catalytically dead, ATGL increases FAHFA biosynthesis. Chemical inhibition of ATGL or genetic deletion of Atgl inhibits FAHFA biosynthesis and reduces the levels of FAHFA and FAHFA-TG. Levels of endogenous and nascent FAHFAs and FAHFA-TGs are 80–90 per cent lower in adipose tissue of mice in which Atgl is knocked out specifically in the adipose tissue. Increasing TG levels by upregulating diacylglycerol acyltransferase (DGAT) activity promotes FAHFA biosynthesis, and decreasing DGAT activity inhibits it, reinforcing TGs as FAHFA precursors. ATGL biosynthetic transacylase activity is present in human adipose tissue underscoring its potential clinical relevance. In summary, we discovered the first, to our knowledge, biosynthetic enzyme that catalyses the formation of the FAHFA ester bond in mammals. Whereas ATGL lipase activity is well known, our data establish a paradigm shift demonstrating that ATGL transacylase activity is biologically important.