Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, has suspended stock lending to traders who bet that shares will go down in price, calling the practice inconsistent with its responsibilities as a long-term investor.
The move, announced by the GPIF on Tuesday, is a blow for so-called “short sellers”, who rely on borrowing stocks to bet against companies and who are facing renewed moves in a number of countries to curb their activities.
“The current stock lending scheme lacks transparency in terms of who is the ultimate borrower and for what purpose they are borrowing,” the GPIF said on its website.
The move by the fund will affect shares in its 42.5 trillion yen ($391.20bn) foreign equities portfolio.
Japanese and overseas shares account for half of the GPIF’s 160 trillion yen ($1.48bn) worth of assets, and the GPIF said it will continue to lend debt securities and may reconsider the halt to foreign stock lending if it sees an improvement in transparency. It does not lend its holdings of domestic shares.
Short sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them, pocketing the difference.
Advocates see short sellers as a healthy counterbalance to investor overconfidence and corporate spin. Critics argue they are destabilising because they have an incentive to drive down a company’s share price.
Elon Musk, the chief executive of Tesla Inc, a popular target for short sellers, was quick to applaud the GPIF’s move.
“Bravo, right thing to do! Short selling should be illegal,” the hi-tech entrepreneur said in a tweet.
Musk has previously criticised fund managers for lending shares for hedge funds to bet against, saying the fund firms made “excessive profit” from the practice.
Securities lending has emerged as a small but significant source of extra returns for funds. GPIF earned 37.58 billion yen ($345.91m) in fees from lending shares from its foreign equity portfolio over three years to the end of its 2018 financial year.
BlackRock, the world’s largest asset manager, reported total securities lending revenue of $597m in 2017, compared with $579m in 2016, according to a securities filing.
In the July-September quarter, GPIF reported a profit of 1.8 trillion yen ($16.6m). Amid Japan’s ultra-low interest rates, the fund, which is closely watched by global investors, has retreated from unprofitable domestic bonds in favour of foreign assets.
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