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How Lucrative Are Repos

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by Felix Salmon
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Nov 30 2007 12:00am EDT

How Lucrative Are Repos?

As 130/30 funds and other long-short plays become increasingly popular, the quantity of short-selling going on in the stock market is only likely to increase. That, in turn, means that the amount of stock lending (repos) going on is going to increase as well: before you can sell a stock you don't own, you have to borrow it from an institutional investor of some sort.

Early last week, I speculated that the income from such stock lending might be "the secret to making money running index funds", but I'm still far from clear on just how profitable a repo desk can be. One commenter said that "for most straight-up index funds, stock lending (repo) is the primary method of both covering costs and potentially exceeding the benchmark," but are we just talking a couple of basis points here, or could it be by quite some margin?

Veryan Allen, in his latest post, notes parenthetically that a mutual fund's holdings "can be lent out to cover the indexation cost" – which implies that although repos might make a bit of money, it's not very much. The actual number shouldn't be hard to work out: it's just the proportion of mutual-fund stocks which are lent out at any given time, multiplied by the average lending rate on those securities. Does anybody know what either of those two numbers might be?

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