As mentioned in a Bloomberg article, research by BeSpoke Investment Group has found that more than $1.4 trillion of global equities are now on loan. This is a third higher than at the start of 2007. Short selling on the NYSE rose to 4.6% of total shares in June, the highest level since 1931. As the market has sold-off, both short positions and subsequent short profits have increased. In fact, short positions in Frannie Mae (FNM) and Freddie Mac (FRE) generated profits of $1.4 billion in July alone.
In addition to recent credit and housing issues, and the higher energy and commodity prices that are fueling inflation and reducing profits, short positions are also increasing in response to extra interest in 130/30 funds. These funds, which often have up to a 30% short position to provide for a higher long exposure, have been on the rise as retail investors look for ways to generate hedge fund-like returns. In fact, investments in such funds are expected to climb to $2 trillion by 2010, from a mere $140 billion last year. This is in addition to other hedge fund replication strategies that also utilize shorting of various securities and products to mimic hedge fund returns.
Of course, just as the SEC is placing restrictions on short selling, other countries are either initiating or increasing access to short selling in a effort to curb rampant long speculation and help contain markets before they reach bubble territory. After the current credit crisis is over, and money begins to flow once again into the financial companies and other securities, don't be surprised if we begin to hear calls from regulators and others looking for ways to pop the bubble and reduce speculation.
Ironically, such calls were happening just a few weeks ago in the crude oil markets (and will no doubt begin again in earnest if prices return to over $140 a barrel). When all is said and done, we may end up with trading that restricts short selling in beaten down industries, while encouraging it in those industries with higher valuations. I am not quite sure that helps the markets reach efficient levels, but it is certainly good news to the next Enron.