[Mike H.]

Most mutual funds generate extra revenue by lending the securities in their portfolios to short sellers. After all, the shorts have to get it from somewhere!

But here's the question: Where does this revenue stream go? For a multi-billion dollar fund, the revenue could be millions. I read once that iShares credits half the revenue to the unit holders, and half to management; essentially a 50% MER on lending the unitholders' assets.

But good luck finding out what other mutual funds do!

And if you have a portfolio of stocks 'on book' with a broker; do you even know whether these are being lent to shorts to bet against your long position? If the brokerage is lending your stock, do they pay you anything for it?

 

[Robillard]

I don't know the answer to your first question, but I think I can answer the second one. I don't think a brokerage can actually lend out stock in your account without permission. It wouldn't make much sense for a broker to do so anyways since individual share holdings are usually small, and short sellers tend to need access to large pools of long positions on the quick.

In the case of mutual funds, the securities are owned by the mutual fund trust; the unitholder is actually only a beneficiary of the trust, and does not own the underlying securities. The fund management company is supposed to manage the trust in the best interest of the beneficiaries/unitholders. They likely reason that it is in the unitholders interest for the fund to be able to purchase securities in an efficient market, and thus make the securities holdings available for shorting. Who knows where the cash goes though? Short sellers actually help make the securities markets more efficient in an economic sense.