The Loan Fee Anomaly: A Short Seller's Best Ideas

Abstract

We find that equity loan fees, which have been largely ignored by the anomalies literature, are the best predictor of cross-sectional returns. When compared to 102 other anomalies and other short selling measures, the loan fee anomaly has the highest monthly long-short return (4.01%), the highest monthly Sharpe Ratio (0.66), and unlike other anomalies, exhibits strong persistence throughout the sample. While prior work has shown that existing anomalies reside in high loan fee stocks, we find that 42% of loan fee outperformance is due to unique information not contained in other anomalies. Future papers that examine cross-sectional predictors of returns should include the single most effective predictor: loan fees.

Keywords: Asset pricing anomalies, equity loan fees, short selling, securities lending

JEL Classification: G12, G14