With all the talk about the effect of short sellers on the stock market, little mention is made of the huge profits short sellers generate for mutual fund management companies and prime brokerages. According to the Financial Times, the investment banks are making so much money charging fees to short sellers at hedge funds, they are ignoring the impact on their own share prices.
A short seller first pays a prime broker such as Goldman Sachs (GS) or Morgan Stanley (MS) to borrow money to fund their short position. At the top of the fee chain are mutual fund management company giants such as Fidelity and Oppenheimer who charge the short seller for borrowing the shares owned by their funds. The mutual fund management companies also profit from reinvesting the short seller’s collateral. Custody banks, such as Bank of New York Mellon (BK) and State Street Corp. (STT) take the borrowed shares from the mutual fund management companies, charging a smaller fee before passing them onto the prime broker who takes a small fee.
Shouldn’t the mutual fund shareholders get their piece of the profit since the management firms are working against them?