Securities Lending and Trading by Active and Passive Funds
45 Pages Posted: 15 Oct 2020 Last revised: 16 Oct 2020
Date Written: January 1, 2020
I study the market for lending and borrowing securities in the United States. I find that by making securities available for borrowing, mutual funds acquire information about short selling, which they exploit for trading. Funds with discretion in their investment choices rebalance their portfolios away from borrowed stocks, avoiding capital losses on stocks with decreasing prices. Funds also trade more aggressively on stocks with stronger signals. Finally, active funds charge lower lending fees than passive funds, consistent with funds paying for the information with lower fees.
Keywords: Equity lending, short selling, mutual funds, information
JEL Classification: G10, G12, G14, G23
Suggested Citation: Suggested Citation