With 1X0/X0 strategies pegged to draw in trillions over the next decade, the sticky question of the potential market impact was top of mind today in New York at a conference focused on portable alpha and 130/30 strategies.  Participants ruminated on portable alpha yesterday.  Today was all 130/30.

With the short selling required for 130/30, the 800 pound gorilla in the room was the finite supply of stock actually available to borrow.  In a posting last fall, we discussed a report by Goldman Sachs on this topic (see related posting).  Speakers here seem to share our skepticism about whether this posed an immediate problem.

However, many weren’t so sanguine about the longer term.  I asked Deutsche Bank’s Brian Bausano, Co-head of Global Prime Finance for the firm, whether there would someday be a “shortage of shorts”.  He replied that, notwithstanding today’s huge excess borrow capacity, potential shortages would be “non-linear” and would likely occur in certain parts of the market first.  For example, he suggested that borrow shortages would likely show up in small-cap names first since small cap names are more likely to be shorted by 130/30 managers and since there is simply less stock available in these names.

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