Fidelity launches platform for fund managers to profit from short sellers
Fidelity Investments Inc. is developing a business that helps fund managers profit from those who wish to bet against stocks.
Fidelity announced this week that it is launching a platform for fund managers looking to lend their holdings to other investors, including short sellers. Fidelity’s move is the latest sign that the money management industry, which once dismissed the company as unnecessary and even a little improper, has come full circle. Securities lending has become an important source of additional income, increasing returns and preventing clients from fleeing to cheaper investments.
The Boston-based company started its securities lending business in 2019, as an agent for the company’s own family of funds. The company is now extending these services to other asset managers. Fidelity Agency Lending is part of the Company’s Capital Markets group and employs over 90 people.
“With pressure on fees and returns, securities lending is a good way to generate low-risk returns for your shareholders,” said Justin Aldridge, head of the unit.
The income from these loans increases the returns of the funds, which helps their managers attract more money to clients. As a loan agent, Fidelity in turn retains a share of this income. Lending a large cap stock can increase a fund’s return by 0.01% to 0.02%. Lending to less liquid stocks, and particularly those in high demand, could add 0.25% to 0.30%, Mr Aldridge said.
Fidelity’s foray comes at a difficult time for short sellers.
Company executives and shareholders of their companies have long criticized them for driving down stock prices and focusing too much on short-term results. Many of these traditional adversaries have also recognized the role of shorts in markets and in exposing corporate fraud.
Earlier this year, however, an army of individual investors took to online messaging forums to rally behind GameStop. Corp.
and other companies frequently targeted by short films. In their attempt to drive up stock prices, angry traders pilloried short sellers. Some well-known short films, including Andrew Left of Citron Research, have been targeted with offensive and threatening texts.
Mr Left has since said he will stop publishing research on short selling.
Mr. Aldridge argued that most of the income that fund managers earn on their securities lending goes to investors in those funds in the form of higher returns.
“The main person who benefits from this is the shareholder,” he said.
According to IHS Markit, industry-wide securities lending revenues grew steadily in the years following the financial crisis and topped $ 10 billion in 2018. Annual revenues totaled $ 9.3 billion. dollars in 2020, down 7% from the previous year as low interest rates limited loan income.
Fidelity has a long history in securities lending, serving for years as a brokerage for hedge funds and other sophisticated investors looking for stocks to borrow and helping its own brokerage clients to lend their securities.
Fidelity’s own family of investment funds used the Goldman Sachs group Inc.
as a loan agent until 2019, paying the investment bank 10% of the income it received on the securities lending. The company aspired to retain a larger share of that revenue and had been in talks with U.S. securities regulators about the plan for nearly a decade.
In 2019, he found the way forward.
Fidelity “took guidance from the Securities and Exchange Commission,” a spokeswoman said, and started its own lending business that year to serve company funds. Rivals BlackRock Inc. and Vanguard Group also serve as loan officers for their own funds.
While the move will help offset the fee reductions Fidelity made to its rapidly growing line of index funds, the company believed its actively managed funds would earn even more.
“We thought of it more as a benefit for active funds than index funds,” Abigail Johnson, chief executive of Fidelity, told the Wall Street Journal in an interview that year. “You need active funds to get a wider variety of stocks, because index funds are all in the same thing. “
With its final step, Fidelity will now compete with Goldman, State Street Corp.
, JPMorgan Chase & Co. and other banks in managing the loan programs of other asset managers. The company’s digital platform allows fund managers to define personalized settings for each individual security in their portfolio.
Mr. Aldridge said Fidelity’s service will give managers more control over what securities they lend and when. For example, a portfolio manager may want to limit lending on certain stocks before voting at shareholder meetings.
Write to Justin Baer at [email protected]
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