Unveiling Mutual Funds' Securities Lending

Abstract

Mutual funds lend trillions of dollars of securities to hedge funds and other borrowers through their lending agents, yet the resulting lending decisions are opaque and largely undocumented. Using newly available SEC filings from 2019 to 2024, we introduce Co-Lending, a measure of how often two stocks are lent together across funds, to distinguish two lending styles: value lending selectively supplies high-fee, ``special'' stocks to informed short sellers, while volume lending supplies broad portfolios at low fees to hedgers. The return predictability of shorting volume and lending fees concentrates in value-lent stocks, with monthly alphas of 2% and 5%, respectively. Lending agents and fund investment styles jointly explain 39% of the cross-fund variation in lending style; the remainder is consistent with fund-manager discretion, confirmed by within-fund manager turnover. Gross lending revenues are similar across the two styles, but value lenders retain a larger share after splits with agents. Exits by value lenders raise borrowing costs and impair price efficiency; exits by volume lenders do neither.

Keywords: Mutual funds, Short selling, Securities lending, Market efficiency