Securities Lending and Trading by Active and Passive Funds

45 Pages Posted: 15 Oct 2020 Last revised: 16 Oct 2020

See all articles by Pekka Honkanen

Pekka Honkanen

HEC Paris - Finance Department

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

Honkanen, Pekka, Securities Lending and Trading by Active and Passive Funds (January 1, 2020). HEC Paris Research Paper No. FIN-2020-1390, Available at SSRN: or

Pekka Honkanen (Contact Author)

HEC Paris - Finance Department ( email )


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