Investors who shortened Russia’s ETFs are now stuck paying never-ending fees

(Bloomberg) – Investors who have been betting on the Russian asset tracking ETF for invading Ukraine have made the right call – and they have been paying the price ever since.

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After and after the outbreak of the stock war with Russia, economic sanctions were inflicted on the country, as evidenced by the bearish gamblers. But sanctions have made it almost impossible for Russian securities to transact, leaving short sellers unable to get out of their positions.

The result? Investors who short-sold – borrowed shares with the intention of buying them cheaper before repaying – are still borrowing, paying the associated fees indefinitely.

The short-selling world is notoriously opaque and influenced by organizations that rarely make their bets. But based on available information, technology and analytics firm S3 Partners estimates that short sellers of Russia-centric exchange-traded funds have paid about $ 2.6 million in loan fees since the products closed in early March.

“Short sellers are in a position where they are now effectively suspended or frozen,” said Jacob Rapaport, head of equities at trading house StoneX. “It’s a tough position to be there when no resolution is in sight.”

Of course, all investors in funds such as the VANAK Russia ETF (Ticker RSX) and iShares MSCI Russia ETF (ERUS) are effectively stuck when US exchanges stop trading and issuers stop making and redeeming shares because the underlying assets are unexpected. However, in general, most of the vehicle fees have been waived so the holders are not losing cash.

Short sellers, on the other hand, typically pay a daily market rate for their borrowed shares. According to S3, the average rate of ETFs has increased from 1% to about 16% this year. And the low interest rate on the ETF before trading closed, according to S3, left শেয়ার 96 million worth of shares in the fund on loan.

Ian Bezek, a Colombia-based investor and financial writer, has $ 10,800 short positions in ERUS. The 33-year-old is now repaying an annual loan rate of about 60%.

“If the lending fee is like 5% or 10%, no problem. But at 60%, it’s definitely a big excitement,” he said. “I have no idea when the situation will change. It’s very frustrating. “

It is unknown at this time what he will do after leaving the post. Moscow-listed stocks are trading again, but foreigners are not allowed to sell them Meanwhile, Russian companies with foreign-listed depository receipts – which hold several ETFs – are being forced to list them by a law that came into force last month.

A family office trader who briefly said RSX asked three prime brokers how he could cover and none of the brokers had an answer. The trader said on condition of anonymity that he had also inquired about getting over-the-counter shares, but brokers and market makers seemed reluctant to make the transaction.

Short-selling headaches appear for the first time in the ETF industry. In previous plays, when a market or asset group closed, the ETF structure allowed them to continue their business. When underlying assets are restarted, they are often consistent with the ETF value. It is a measure of the unrest that on this occasion, ETFs also had to stop.

Read more: ETFs finally find a crisis that they can’t trade through Ukraine

The securities-lending market is covered by the Securities and Exchange Commission, although it is not clear whether regulators will be involved because no rules have been broken. A SEC spokesman declined to comment.

The RSX, the largest Russia-centric ETF, had an annual lending rate of 1% at the beginning of the year, according to S3. As Russia-Ukraine tensions intensified, the rate rose above 20% before falling slightly. Data from S3 captures market rates, but rates may vary between brokers.

Short sellers are not the only group affected by the rising cost of debt. Some put holders have tapped the securities lending market to find shares to use their options – and those who have are still paying.

Russell Edwards, a UK-based retailer, was able to borrow 2,200 shares of RSX in March to practice put options. For his brokerage, he has to pay a current lending fee of around 30%. It’s a minor drag on his tiny portfolio for now, but the 26-year-old doesn’t know how long it will last.

“If all of a sudden those shares cost too much for a loan and it’s 300% the next day, I really have no way,” he said, to help avoid fees. “I’m just waiting.”

In the fog of attacks and sanctions, some holders and brokers have stopped offering shares for loans, according to Ihor Dusaniuski, head of S3’s predictive analysis. This, in addition to stopping issuers from creating new shares, has limited the supply available for borrowing, which has led to higher rates, he said.

Trapped in their bearish bets, the borrowers have to face the possibility that they will lose their winning bets when they can get out. They need funds and stock trading again to cover their position, but this will probably only happen when the Russia-Ukraine war subsides and the outlook improves dramatically – which could restore asset prices.

In such a scenario, “I wouldn’t be surprised if my short position lost me a lot of money,” said Abraham Miller, a Seattle-based software engineer who is undermining ERUS.

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