Hostname: page-component-6766d58669-zlvph Total loading time: 0 Render date: 2026-05-16T10:22:50.110Z Has data issue: false hasContentIssue false
  • English
  • Français

Securities Lending and Trading by Active and Passive Funds

Published online by Cambridge University Press:  23 January 2025

Pekka Honkanen Open the ORCID record for Pekka Honkanen [Opens in a new window]
Pekka Honkanen*
Affiliation:
Terry College of Business, University of Georgia
*
pekka.honkanen@uga.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

U.S. mutual funds in the securities lending market extract information from stock borrowing. Active funds exploit this information, rebalancing away from borrowed stocks whose prices tend to decrease, whereas passive funds do not. Information spillovers within fund families are stronger when the lender is a passive fund and when the family is more cooperative (less competitive). Active funds trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, consistent with short sellers paying a premium to lower recall risk.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 60 , Issue 3 , May 2025 , pp. 1272 - 1309
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Hendrik Bessembinder (the editor), an anonymous referee, Thierry Foucault, Bruno Biais, Jean-Edouard Colliard, Denis Gromb, Johan Hombert, Daniel Schmidt, Huan Tang, and Filipe Correia for their generous comments and advice.

Funding Statement: This research is supported by the Finnish Foundation for Economic Education and the Investissements d’Avenir Labex (ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047) grant.

References

Agarwal, V., and Zhao, H.. “Interfund Lending in Mutual Fund Families: Role in Liquidity Management.” Review of Financial Studies, 32 (2019), 4079–4115.CrossRefGoogle Scholar
Appel, I.; Gormley, T. A.; and Keim, D. B.. “Passive Investors, Not Passive Owners.” Journal of Financial Economics, 121 (2016), 111–141.CrossRefGoogle Scholar
Appel, I.; Gormley, T. A.; and Keim, D. B.. “Identification Using Russell 1000/2000 Index Assignments: A Discussion of Methodologies.” Critical Finance Review, 13 (2025), 151–224.CrossRefGoogle Scholar
Bhattacharya, U.; Lee, J. H.; and Pool, V. K.. “Conflicting Family Values in Mutual Fund Families.” Journal of Finance, 68 (2013), 173–200.CrossRefGoogle Scholar
Boehmer, E.; Jones, C. M.; and Zhang, X.. “Which Shorts Are Informed?” Journal of Finance, 63 (2008), 491–527.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chaudhuri, R.; Ivković, Z.; and Trzcinka, C.. “Cross-Subsidization in Institutional Asset Management Firms.” Review of Financial Studies, 31 (2017), 638–677.CrossRefGoogle Scholar
Dannhauser, C. D., and Spilker, H. D.. “The Modern Mutual Fund Family.” Journal of Financial Economics, 148 (2023), 1–20.CrossRefGoogle Scholar
Engelberg, J. E.; Reed, A. V.; and Ringgenberg, M. C.. “How Are Shorts Informed? Short Sellers, News, and Information Processing.” Journal of Financial Economics, 105 (2012), 260–278.CrossRefGoogle Scholar
Evans, R. B.; Ferreira, M. A.; and Prado, M. Porras. “Fund Performance and Equity Lending: Why Lend What You Can Sell?” Review of Finance, 21 (2017), 1093–1121.CrossRefGoogle Scholar
Evans, R. B.; Porras Prado, M.; and Zambrana, R.. “Competition and Cooperation in Mutual Fund Families.” Journal of Financial Economics, 136 (2020), 168–188.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns of Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Gaspar, J.-M.; Massa, M.; and Matos, P.. “Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization.” Journal of Finance, 61 (2006), 73–104.CrossRefGoogle Scholar
Greppmair, S.; Jank, S.; Saffi, P. C.; and Sturgess, J.. “Securities Lending and Information Acquisition.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3604977 (2020).CrossRefGoogle Scholar
Jones, C. M.; Reed, A. V.; and Waller, W.. “Revealing Shorts: An Examination of Large Short Position Disclosures.” Review of Financial Studies, 29 (2016), 3278–3320.CrossRefGoogle Scholar
McCullough, A. “Securities Lending: An Examination of the Risks and Rewards.” Morningstar Manager Research, December 2018.Google Scholar
Palia, D., and Sokolinski, S.. “Strategic Borrowing from Passive Investors.” Review of Finance, 28 (2024), 1537–1573.CrossRefGoogle Scholar
Porras Prado, M. “Future Lending Income and Security Value.” Journal of Financial and Quantitative Analysis, 50 (2015), 869–902.CrossRefGoogle Scholar
Rapach, D. E.; Ringgenberg, M. C.; and Zhou, G.. “Short Interest and Aggregate Stock Returns.” Journal of Financial Economics, 121 (2016), 46–65.CrossRefGoogle Scholar
Supplementary material: File

Honkanen supplementary material

Honkanen supplementary material
Download Honkanen supplementary material(File)
File 755.7 KB