Unveiling Mutual Funds' Securities Lending Strategies: Value versus Volume

48 Pages Posted: 25 Jun 2024

See all articles by Shuaiyu Chen

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business

Anh Tran

University of Connecticut

Pingle Wang

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: September 12, 2024

Abstract

Using mutual funds' securities lending patterns, we propose a data-driven method using association rules to differentiate shorting demand for general hedging and for exploiting firm-specific negative information. This method enables us to classify funds into two distinct lending strategies: value lending (low quantity and high fee) and volume lending (high quantity and low fee). Contrary to the common prior that securities lending is conducted at the fund family or lending agent level, we find rich heterogeneity in funds' lending strategies within these groups. We find that volume lenders generate higher lending revenue, allowing them to better offset fund expense ratios compared to value lenders. Notably, while volume lenders faced setbacks in cash collateral reinvestment during the 2007 financial crisis, recent data shows that value lenders have doubled their reinvestment into riskier assets, such as equities and bonds, and have strategically shifted within these assets to capitalize on the high interest rate environment post-2022.

Keywords: Mutual funds, Securities lending, Cash collateral reinvestment

Suggested Citation

Chen, Shuaiyu and Tran, Anh and Wang, Pingle, Unveiling Mutual Funds' Securities Lending Strategies: Value versus Volume (September 12, 2024). Available at SSRN: https://ssrn.com/abstract=4867141 or http://dx.doi.org/10.2139/ssrn.4867141

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Anh Tran

University of Connecticut ( email )

CT
United States

Pingle Wang (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

HOME PAGE: http://www.wangpingle.com

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