Long/short: what can the securities lending market tell us about short risk?

DFA's research sheds some light

Many mutual funds and ETFs lend their securities to generate a little additional portfolio income.

Hedge funds and nowadays tax-aware long/short separate account managers borrow those securities and sell them, creating short positions.

Short sellers pay a borrow fee for the pleasure of borrowing securities (see my article: what is a borrow fee and is it deductible?). For large-cap names, it tends to range from 20 basis points to 50 basis points.

Dimensional Fund Advisors has been lending securities from its funds for years and wrote a cool research paper on securities lending and borrow fees in 2020 (Hendrix, Crabb: Borrowing Fees and Expected Stock Returns).

Their research shows that borrow fee is a valuable signal for predicting which stocks will underperform.

Since tax-aware long/short continues to grow like a weed, and securities lending and borrowing are two sides of the same market, what can borrow fees tell us about short selling risk?