When institutional investors assess investment opportunities, a key consideration is the expected incremental return relative to the marginal risk, as well as the diversification benefits the investment might bring to the entire portfolio. In this analysis, we take the same approach in evaluating securities lending.

At first glance, the absolute returns generated from securities lending can seem relatively small. For example, some research suggests that lending returns are smaller than market index returns, but securities lending offers superior risk-adjusted performance.¹ We extend previous studies to evaluate the returns relative to risks in a more holistic view. Our analysis encompasses more than 5,000 anonymized and aggregated securities lending programs over 15 years (2008 to 2023) to quantify the historical returns relative to losses.

The empirical evidence suggests that the incremental return from securities lending is well above the marginal risk, especially during periods of crises, and that the returns generated from securities lending tend to have a low or negative correlation with traditional asset classes, leading to favorable diversification characteristics.