World’s Biggest Pension Fund Stops Lending Shares To Short-Sellers Amid Threat Of Market Crash

Ahead of the next market crash, Japan’s public pension fund, one of the largest pension funds in the world, has developed a new market tool where it will no longer allow shares of its $733 billion global equity portfolio to be loaned out for short selling, reported the Financial Times.

The announcement by Government Pension Investment Fund (GPIF), comes at a time when the global economy is quickly decelerating into year-end, could see a significant repricing event where global equities correct into 1H20. 

To get ahead of the downturn, about $370 billion of its $733 billion global equity portfolio will no longer be loaned out. It could be used as a weapon to combat evil short-sellers when the market plunges. If other pension funds follow GPIF’s lead, which they likely will, this could be a highly disruptive market tool to stem downside and also create the mother of all short squeezes. 

The reasoning behind GPIF’s move to discontinue lending of at least half of its global equity book isn’t because it’s “concerned that lending stocks out stopped it exercising proper stewardship over the underlying investments. This included a lack of transparency over the final borrower and how it was using GPIF shares,” as FT notes, but rather it’s an unorthodox market tool that was similarly used by the Chinese government to stem further downside in a 2015 stock market crash.

GPIF will lose nearly $300 million in fees per year from discontinuing its lending of shares from the foreign segment of its portfolio, FT noted. 

Traders in Tokyo told FT that other pension funds will likely follow suit. Though they said, the move to stop lending shares to short-sellers wouldn’t have an immediate impact on market fundamentals, though it could prove useful to limit the downside during the next market crash. 

And it already seems like Elon Musk is already a big fan of GPIF’s market tool:

Bravo, right thing to do! Short selling should be illegal.

— Elon Musk (@elonmusk) December 3, 2019

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