SAN FRANCISCO (MarketWatch) -- The hedge fund boom rarely presents new money-making opportunities for individual investors.
Now, however, increasing competition in one corner of the business is giving retail shareholders the chance to generate extra cash from the assets in their brokerage accounts.
Short selling, in which traders bet against stocks, has become more competitive in recent years as hedge fund assets soar and managers proliferate. Short sellers borrow a stock, betting its price will fall. When they return the shares to the lender at the original price, they profit from the difference.
Usually, institutions with big, long-term stakes in companies earn interest in exchange for lending their stock to Wall Street firms. Those investment banks then lend the securities on again to short sellers at a higher rate. But with more hedge fund managers searching for profitable short trades, some stocks have become much more difficult to borrow.
The trend has encouraged brokerage firms to offer to pay retail investors to lend their shares too.
Charles Schwab, the largest discount broker, runs a service in which it offers to pay customers interest on any loans of hard-to-borrow stocks from their brokerage accounts. The rate varies, depending on how much demand there is to borrow the stock.
Schwab, which launched its Securities Lending Fully Paid Program in 2004, markets the service to investors and financial advisers, summing it up in a brochure entitled "Hard-to-find stocks. Hard-to-resist opportunities."
The firm also draws up a list of dozens of hard-to-borrow stocks. A recent copy of the list obtained by MarketWatch contains 76 stocks.
Homebuilders such as KB Home, Brookfield Homes and Dominion Homes are also on the list, along with mortgage lenders like IndyMac Bancorp, Delta Financial and American Home Mortgage.
