Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
High borrow cost US equities outperformed by 9% in April - the
most ever
Short interest fell more than loan balances in April,
reflecting HF deleveraging
Airlines and cruise lines attract increased short positions in
May
April came in like a lion and tore the bear to shreds. Over the
four weeks of April 2020, highly shorted US equities outperformed
those with lower short interest by the most on record for any
month. That statement holds for a variety of measures of short
interest (borrow cost, utilization of lendable shares, borrowed
shares as % outstanding, exchange SI % outstanding). It is also
true for a US equity total market capitalization universe, as well
as large and small cap in isolation. Other contenders in "worst
month for shorts" include April 2009 and April 2016. The most
hard-to-borrow (HTB) US equities outperformed the average returns
for the rest of US equities by 9% in April, a harsh snapback after
HTB only managed to underperform by 2% in the March crash.
As noted in our Q1 webinar, the US equity
short interest in dollar terms fell with the market in the first
quarter, with the short interest observation for March 31st ($595m)
the lowest level since 2014. The decline in short interest reported
by the exchanges was double the decline in US equity value on loan
reported by IHS Markit Securities Finance. That gap is justified by
a reduction in internalization by dealers and increased borrowing
for ETF creation. The reduction in internalization was interpreted
as likely being related to hedge fund deleveraging. Seeing the
short interest value decline by roughly the same amount as the
broader market suggests that there wasn't any significant increase
in short selling during the crash.
In the May 2020 Financial
Stability report the Federal Reserve Board noted that
although dealers had reported, in the March Senior Credit Officer
Opinion Survey on Dealer Financing Terms, "that the use of leverage
by hedge fund clients was about unchanged in the fourth quarter of
2019 and the first quarter of 2020," that subsequently "hedge funds
reportedly reduced their leverage significantly as market
volatility rose and many hedge funds experienced margin calls." A
reduction in hedge fund leverage reduces the supply of shares that
dealers can source internally to settle short positions; Short
interest increased by 23% in April, while the value on loan only
increased by 13%, which may reflect hedge funds starting to
increase gross exposures again (which in turn increases internal
supply and reduces the need to borrow externally to settle a short
sale).
Conclusion:
Being long a stock with significant short interest whose price
increases on a parabolic trajectory seems like a good time,
particularly coming out of a market crash. Following that
experience, one might reasonably look for other such opportunities,
which may be the current collective mindset of short-term traders
at present. Over the last six weeks, the market has rewarded
betting that crowded shorts will outperform. Instances of HTB
outperformance have generally been brief, however there have been
two previous three month long periods of outperformance since 2008,
so while the scale of April is extreme, the duration of this HTB
rally is not (yet). The prior two times HTB equities outperformed
by as much as they did in April, the preceding month also featured
outperformance and was followed by at least two months of the
typical underperformance of HTB (gross of fees); Through the first
three weeks of May, HTB equities have continued to outperform by
0.8% on average. Two sectors which have seen increased share
borrowing in May include airlines and cruise lines, which have been
particularly hard hit by the COVID-19 shut down. Some of that
increase in shorting likely reflects directional short bets and
sector hedges, however the issuance of convertible debt is also a
demand driver.
Posted 22 May 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
