I’ve been thinking recently. Because of the ownership profile of most mutual funds (individual punter), you don’t hear of anyone lending out units to short. However, over here (UK) with the development of platforms and aggregators, the institutional ownership of OEICs and Unit Trusts is increasing. I wonder if it would be possible to persuade them to lend units out to sell short - you’d pay them the mutual fund’s return plus fees - robert’s your mother brother, and you’ve captured the underperformance of active managers. They get to own the units without paying management fees (effectively), you get to short the hell out of rubbish managers. Sounds win-win to me…
Except the mutual fund managers won’t let them. If you short sell a mutual fund, the person you sell it to is not putting their money in the mutual fund; you are paying their return. That means the mutual fund manager isn’t getting paid. That means that they are going to do whatever they can to stomp this out. That said, I’ve seen it offered before.
The mutual fund manager not being paid is half the benefit! With the institutional ownership, how would they know that the units being sold back to them (as it is the asset manager who repurchases units) are being lent or have been purchased? I agree the incentive is to stomp on it, but that hasn’t stopped people in other markets… Maybe I should set up a secondary market…
Doing a swap is probably better because that way I avoid buying someone else’s tax problem by taking the long side.
Not an issue in the uk.