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Shorting ‘makes billions’ for fund managers

Conservative fund management firms and custody banks are making billions of dollars from short-selling by lending stocks to facilitate such trades in exchange for lucrative fees. Even as short-sellers attract blame for driving big falls in financial stocks, financial services firms – including those targeted by short-sellers – are profiting from the investing strategy. Short-sellers profit by borrowing shares, then selling the shares in the expectation the price will fall. When the price drops, they buy them back, and pocket the difference. US prime brokerage firms, most of which are owned by big Wall St banks, will reap revenue of $11bn this year, according to a recent study by Tabb Group, a research business. Meanwhile, US regulators yesterday night said they would grant some leniency to certain market makers who sell stocks short, according to Reuters.

This entry was posted by James Fontanella on Friday, July 18th, 2008 at 5:35 and is filed under Capital markets. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Jul 18   13:29 Posted by A Lawrence [report]

    When times are good the shorts are lauded for making markets more efficient (while they lose money). When things turn around they’re blamed for driving prices down. Can’t have your cake and eat it, too.

  2. Jul 18   11:51 Posted by Ed [report]

    Thanks Reggie.

  3. Jul 18   9:49 Posted by Reggie Perrin [report]

    @ Ed

    many funds are benchmarked/rewarded by performance against an index

    fees from stock-lending will not cover asset moves (which wd/cd happen anyway) but will create RELATIVE outperformance and therefore targets/bonuses etc

  4. Jul 18   9:38 Posted by Ed [report]

    Surely if the fees fully (or more than fully) compensate them for any loss in value of the shares, the short wouldn’t be worth doing from the shorter’s point of view?

    I can see how this would soften the blow of asset price declines (from the pension fund’s pov) but if the stock DOES fall, and the short is in the money, surely while they’re making billions of dollars in fees, they’re losing billions in asset value?

  5. Jul 18   9:03 Posted by Ando [report]

    Good! Gives long-only pension fund investors etc a way to make a bit of money when stocks are declining.

  6. Jul 18   9:00 Posted by anon [report]

    Shorting does NOT make billions for fund managers. Shorting makes billions for the CLIENTS of fund managers. V misleading, its the pensioners and other such investors that benefit from the majority of the fees paid to borrow stock not the fund management companies.

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