Alpha Survey · in search of alpha
Menu
Glossary

Borrow fee

The rent you pay to borrow a share so you can sell it short.

To sell a share short you must borrow it first, and the lender charges rent. That rent is the borrow fee, quoted as a yearly percentage of the position and charged day by day. For most large stocks it is small, a fraction of a percent. For a few, the ones many people want to bet against and few will lend, it can run to tens of percent a year.

The fee is information: it says how crowded the short side is. It is also a cost that any honest test of a short strategy has to subtract from the returns, every day, because the strategy pays it every day. Many pitches skip that subtraction.

Explore the diagram (scroll horizontally on small screens)
Yearly rent to borrow the shares0.4%Most large stocks8%Crowded shorts40%Hard to borrowThe same short, before and after the feeGross (what the pitch shows)Net of the fee, every dayTime held →
Month 1Month 2, rebalanceShort (hard to borrow)SqueezeSqueeze
Up session Down session What we expected Sounded windowIllustrative, not market data
Illustrative. Short the most expensive-to-borrow stock: we expected an orderly decline (dotted). What we found was the same direction with violent squeezes on the way, which is where the variance that killed the statistic lives.

Where this word comes up

First needed in the log entry H-059 · Testing the shorting premium: what a rebalancing bug taught us.

From the same entry: Crowded shorts, Decile, Delisted, Long-short portfolio, Rebalance, Recall, Short interest percentage, Short selling, Squeeze, t statistic, Universe.

← All terms