long-only vs long/short
How the same funding rate shows up as a hurdle, a bill or an income depending on which way the position faces.
concept note · live ratesrates touch every strategy, just from different sides
It's tempting to think interest rates only matter to people who borrow. But every equity strategy either uses cash (a long needs paying for) or generates it (a short sale hands you cash). So the rate is always in the P&L. What changes is the sign.
A long is owning an umbrella: you either paid cash for it or you're paying interest on the loan that bought it.
A short is borrowing someone's umbrella and selling it today, planning to buy one back cheaper later and return it. Meanwhile you hold the cash from the sale and earn interest on it, but you pay the owner a rental fee. Usually the fee is tiny. When everyone wants to short the same umbrella, the fee can jump above the interest you earn. That's a hard-to-borrow stock.
And if the umbrella pays a dividend while it's lent out, you owe the owner that too.
a year of carry, before any price move
Per 10m of position, using today's SOFR (3.62%) and one-month HIBOR (2.90%). Illustrative assumptions: 45bp long spread, 30bp short spread, 5% hard-to-borrow fee, 2% dividend yield in both markets so the rate is the only difference.
| Strategy | Carry formula | USD (SOFR) | HKD (HIBOR) | If rates rise 1pp |
|---|---|---|---|---|
| Long-only, paid in cash | dividends − rate (vs keeping it in cash) | −$162,000 | −HK$90,000 | hurdle rises: the stock must beat a higher cash return |
| Long via swap (synthetic) | dividends − (rate + 45bp) | −$207,000 | −HK$135,000 | −1% of notional a year per 1pp |
| Short, easy to borrow | (rate − 30bp) − dividends | +$132,000 | +HK$60,000 | +1% of notional a year per 1pp |
| Short, hard to borrow | (rate − 5% fee) − dividends | −$338,000 | −HK$410,000 | same, but the fee dominates |
| Long/short 100/100 | long carry + short carry: the rate cancels | −$75,000 | −HK$75,000 | ≈ zero: rate cancels, only spreads and borrow remain |
Simple annual interest, ignoring day counts and compounding, so the shape of the argument stays visible.
what the table is teaching
Long-only. A long-only fund never pays a funding bill, but it has a hurdle: its clients could hold cash instead. When SOFR is 4–5%, stocks have to earn 4–5% before they've added anything. Higher rates also raise the discount rate used to value future earnings, which tends to hit long-duration growth stocks hardest.
Leveraged or synthetic long. Now the rate is an explicit cost. Every 1pp rise in SOFR costs 1% of notional a year, whatever the stock does.
Short. The mirror image: higher rates mean more interest on the short-sale cash. That is part of why short books felt less painful to hold once rates left zero. The exception is hard-to-borrow names, where the fee can swamp the interest entirely.
Long/short. This is the insight I found most useful: in a dollar-neutral book, the reference rate cancels out. You pay it on the long and earn it on the short. What's left is the two spreads plus borrow fees, which is the prime broker's margin. That's why rates move a market-neutral fund's hurdle more than its costs.
a quick map
| Strategy | Net cash position | Rate exposure | Watch out for |
|---|---|---|---|
| Long-only | fully invested, no borrowing | via valuation and hurdle only | opportunity cost when cash yields a lot |
| 130/30 | extra 30% long funded by 30% short | small; mostly cancels | short squeezes and borrow recalls |
| Market-neutral long/short | long ≈ short | rate cancels; spreads remain | borrow fees, spread widening at the PB |
| Net-long hedge fund (e.g. 150/50) | borrowing for the net long | pays rate on the net | margin calls when prices and rates move together |
| Index arbitrage / cash-and-carry | long stock, short future | earns the implied rate in the future | dividend forecast error; the implied rate vs your own funding |
- Longs use cash, shorts generate it, so the rate hits them with opposite signs.
- Long-only feels rates as a hurdle; a leveraged long feels them as a bill.
- In a dollar-neutral long/short book the reference rate cancels; the spreads and borrow fees don't.
- Hard-to-borrow fees can turn short income negative even when rates are high.