By Tom Westbrook and Alun John

SINGAPORE/HONG KONG, Oct 12 (Reuters)Short selling has declined this year as hedge funds ditch bets against a relentless, stimulus-driven stock market rally, prompting a drop in income for asset managers and brokers involved in such trades.

Figures from research firm DataLend showed stock lenders’ revenue tumbled almost 15% in the year to Sept. 30 from 2019 while revenue for the September quarter alone was $1.8 billion, the lowest in the four years of comparable records.

That drop, led by declines in Asia and the United States, shows how an apparently unstoppable equities rally has caused many hedge funds to reduce shorting, typically a crucial way of earning market-beating returns.

“It’s ‘whatever it takes,’ globally, and it is by far the most frustrating rally for all our client base,” said George Boubouras, head of research, at K2 Asset Management, a Melbourne based fund which invests worldwide.

“With so much liquidity from central banks it is a difficult macro environment to run sustained short positions.”

In one sign short interest has declined, the volume of units of the index-tracking SPDR S&P 500 ETF SPY.P on loan hit a six-month low in mid September, data from research firm FIS Astec shows.

Analysts and brokers say this trend means less liquidity for traders and pressure on those who use stock lending revenue to keep trading fees low.

Blackrock BLK.N, for example, the world’s largest asset manager, earned roughly 6% of its $3.6 billion in quarterly revenue from stock lending in the June quarter, while State Street STT.N earned about 4% of its Q2 revenue.

“For Blackrock and others, a hit to securities lending revenues is likely to be a pain point,” said Stephen Biggar, director of financial services research at Argus Research in New

(Bloomberg) — Fast-money wagers against longer-dated Treasuries have hit a record in a sign hedge funds are positioning themselves ever more aggressively for a steeper yield curve.

Net short speculative positions in long bond futures saw the biggest weekly climb since 2007 to reach around 209,000 contracts, according to the latest Commodity Futures Trading Commission data. Meanwhile, net long positions on 10-year Treasuries have risen to their highest since October 2017.

So-called steepener trades are often seen as bets on reflation, while investors are also positioning for the possibility of greater deficits should the Democratic party prevail in November’s election. A new Wall Street Journal/NBC News poll taken after Tuesday’s debate showed Joe Biden leading Donald Trump by 14 percentage points. It was taken before the president was diagnosed with coronavirus.

chart: Speculators long bond positions at record net-short as 10-year yields bets climb

© Bloomberg
Speculators long bond positions at record net-short as 10-year yields bets climb

The surge in shorts appears to be related to new wagers on the direction of the curve, rather than so-called basis trades which bet on the spread between bonds and futures, according to JPMorgan Chase & Co. strategists including Jay Barry.


Load Error

“We think curve positioning could be behind those moves,” they wrote in a note to clients Friday. “While outright exposure to duration positions are not large, curve steepening positions remain large relative to historic ranges, and the risk is these trades could be unwound.”

The spread between the 10-year and 30-year yields has widened by more than 30 basis points so far this year and was at around 79 basis points on Monday. It reached near 81 basis points in June, the year-to-date high.

Big Risk for Bonds Is That U.S. Election Actually Goes Smoothly

Similar bets are also being made in the swaption market. Options on swap rates show the cost

As you can see in the following chart, the ProShares Ultra VIX Short-Term Futures ETF (UVXY) has continued downwards during the month with shares erasing most of the gains seen earlier this summer.

At present, I have two different views on UVXY. In the short term, I believe that we’re likely going to see some upside in the instrument in line with seasonal tendencies in the VIX. In the long term, however, I believe that we are almost certainly going to see UVXY head lower.

VIX Markets

To kick this piece off, let’s take a broad thematic look at the current VIX levels.

The VIX is sitting around 27 at the time of writing. Over the past month, we have seen a fair degree of volatility in the VIX with the index hitting as high as 38 early September after touching numbers in the low 20s a few days prior.

Historically speaking, the current VIX level is actually suggestive of short-term declines going forward.

As you can see in the above chart, when the VIX is around the same level that it’s sitting at today, the odds of it rising over the next month are only about 27%. In other words, over the last 27 years, the VIX fell 73% of all times that it was sitting at levels similar to what we’re seeing today.

An important thing to note about this study is that it is very broad – that is, it takes the simple level of the VIX and uses it predictively. In my opinion, this type of study works most of the time (as clearly seen in the statistics); however, it must be framed up by current developments in the markets. Let’s take a short-term look at the S&P 500 to try and gauge where it may

(Bloomberg) — South Korea’s government has found a tool to keep the retail investors that are increasingly dominating the stock market happy: A short-selling ban that’s turning into one of the world’s longest and broadest.


Load Error

In August, the government extended the ban the country imposed in March for another half a year, much to the consternation of institutional investors needing to short sell to manage risks. That ban was prolonged even though the benchmark Kospi has soared more than 60% since its March swoon. The extension makes the ban one of the longest by any major market in the wake of Covid-19.

The rationale for this continued ban lies with the increasing importance of individual investors, who make up 70% of the stock market now, according to analysts and regulators.

The dilemma for Seoul is that with so many mom-and-pop investors entering the market this year, reintroducing short selling could cause a crash and upset an electorate that’s increasingly invested in the stock market’s performance.

Korean regulators are now discussing a partial lift of the extended ban when it expires on March 15: Only blue chip-stocks could be allowed to be sold short, a senior official who isn’t authorized to speak publicly told Bloomberg. The Financial Services Commission, a regulator overseeing Korea’s short-selling rules, declined to comment on the issue.

chart: South Korea's stock market rose while others with short-sell bans fell

© Bloomberg
South Korea’s stock market rose while others with short-sell bans fell

The ban has frustrated institutional investors, both local and foreign, who have been put off from investing in South Korea. Their trading value has dwindled to just 35% of the Kospi’s total versus 52% at the end of 2019, according to the Korea Exchange. Institutional investors also have to battle a perception that short-selling can be used to manipulate the market, especially after the government