Stock buyers only have one primary concern when it comes to making money — is the stock price rising or falling? Short sellers, on the other hand, must also keep track of their borrowing costs or a profitable trade could easily turn into a loser.
The vast majority of stocks available to borrow trade at general collateral levels, according to S3 Partners analyst Ihor Dusaniwsky. However, these relatively low borrow rates only apply to about two-thirds of all U.S. equities. About 35% of U.S. stocks come with higher borrow fees, and Dusaniwsky said this week that 9% of U.S. stocks have borrow fees of at least 10%.
“If short sellers are not vigilant in monitoring stock borrow costs their short trades that are profitable on a mark-to-market basis may in fact be losers on a net-of-financing basis,” Dusaniwsky said.
Winners Turn To Losers
For example, short sellers of Beyond Meat Inc BYND, Overstock.com Inc OSTK and Amyris Inc AMRS would have all turned a profit in 2019 on their trades based on share price action alone. However, short sellers in all three stocks are net negative on the year due to the stocks’ high borrow costs.
“Even if a stock’s high stock borrow costs don’t turn a short trade into a loss, high stock borrow fees can take a chunk out of a big winner’s returns,” Dusaniwsky said.
Canopy Growth Corp CGC short sellers have a mark-to-market year-to-date profit of more than $85.4 million. But borrowing costs have eaten more than half of those gains, leaving net profit on the year at only $36.6 million.
Short selling can be more risky than going long for several reasons, including the market’s general trend higher over time and an inverted risk-reward skew that caps theoretical profits at 100% while losses are unlimited. Borrow fees are merely one of the many things that makes successful short selling extremely difficult.
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