State Street conducted a deep dive on securities lending, noting that while the returns may seem small on an absolute basis, it provides strong risk-adjusted returns, offers diversification benefits due to low correlation with other investments, and performs especially well during market crises.
Diversification properties and risk-adjusted performance of security lending
State Street
Travis Whitmore
Research
29 Pages
Key Takeaways
Superior Risk-Adjusted Returns: While absolute returns from securities lending may appear modest, the study finds that these programs offer superior risk-adjusted performance compared to traditional market indices.
Diversification Benefits: Securities lending returns exhibit low or negative correlations with traditional asset classes, suggesting that incorporating them into a portfolio can provide favorable diversification benefits, especially during market downturns.
Crisis Performance: The analysis indicates that the incremental returns from securities lending are well above the marginal risks, particularly during periods of financial crises, underscoring their resilience in turbulent markets.
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