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 (1.4 billion pounds), 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 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, 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 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 York.
"The revenues generated were a big rationale for how fund companies were able to lower their fees."
Blackrock declined to comment ahead of reporting earnings on Tuesday.
A large driver of the drop in revenues this year is the lack of "specials," crowded short-seller targets that can net lenders good fees, said DataLend director Nancy Allen.
Last quarter, the top five fee earners, German battery maker Varta, electric truck maker Nikola, cruise line Carnival Corp, cannabis producer Canopy Growth and drugmaker Inovio earned lenders $120 million, DataLend said. That was less than half what the top five made a year earlier.
To be sure, short interest has not totally evaporated, with some $2.2 trillion of stock globally on loan, Allen said, while rising share prices have powered other revenue streams for lenders and brokers.
But market participants warn reduced short-selling could have other consequences.
"Lending and short-selling activity are important to the health of the market ecosystem as a whole," said Stuart Jones, chairman of industry body the Pan Asia Securities Lending Association. "Without them, you start to lose liquidity and a corrective force that can counter more exuberant prices."
(Reporting by Tom Westbrook in Singapore and Alun John in Hong Kong; Editing by Sam Holmes)
By Tom Westbrook and Alun John