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Stats › Intraday and market microstructure › Loan fee anomaly

The hardest stocks to borrow underperform, and the borrow fee eats three quarters of it

Top and bottom 1%|Sharpe 0.58 grossGross: 3.63%Net of loan fees: 0.97%0.97%Top and bottom 2%|Sharpe 0.53Gross: 2.64%Net of loan fees: 0.82%0.82%Top and bottom 5%|Sharpe 0.48Gross: 1.76%Net of loan fees: 0.69%0.69%Top and bottom 10%|Sharpe 0.40Gross: 1.17%Net of loan fees: 0.48%0.48%GrossNet of loan fees

Monthly long short returns from sorting US stocks on equity loan fees, before and after paying the borrowing cost on the short leg, 2006 to 2019. The narrower the cutoff the larger the gross return and the larger the proportion the borrow fee takes. These are returns, not factor model alphas; the paper reports no alphas.

Sorting on equity loan fees produces 3.63% a month gross at the tightest cutoff. Net of the borrowing cost that creates the signal, the same portfolio returns 0.97%. That is still far more than the average published anomaly earns net of the same costs.

3.63% a monthLong short return at the 1% cutoff, gross of borrowing costs
0.97% a monthThe same portfolio net of loan fees
0.01% to -0.04%Average published anomaly net of borrowing costs, for comparison
-0.41%Panel coefficient on a one standard deviation higher loan fee, t = -8.24

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