Increases in Shorting, Only for Some

As mentioned in a Bloomberg article, research by BeSpoke Investment Group has found that more than $1.4 trillion of global equities are now on loan. This is a third higher than at the start of 2007. Short selling on the NYSE rose to 4.6% of total shares in June, the highest level since 1931. As the market has sold-off, both short positions and subsequent short profits have increased. In fact, short positions in Frannie Mae (FNM) and Freddie Mac (FRE) generated profits of $1.4 billion in July alone.

In addition to recent credit and housing issues, and the higher energy and commodity prices that are fueling inflation and reducing profits, short positions are also increasing in response to extra interest in 130/30 funds. These funds, which often have up to a 30% short position to provide for a higher long exposure, have been on the rise as retail investors look for ways to generate hedge fund-like returns. In fact, investments in such funds are expected to climb to $2 trillion by 2010, from a mere $140 billion last year. This is in addition to other hedge fund replication strategies that also utilize shorting of various securities and products to mimic hedge fund returns.