Fresh figures from data provider Markit shows just over one per cent of FTSE 100 shares were out on loan at the end of September, compared to more than four per cent at the height of the financial crisis in March 2008.
The figure is the lowest since Markit started recording the data in November 2006, when the figure was just under 2.5 per cent.
It comes as performance data shows hedge funds enjoying a stellar year this year.
The number of stocks out on loan is used as a common measure of short positions held by hedge funds across the world. Investors have to borrow shares in order to make a bet the price of the share will fall.
Further figures from Markit show a similar theme across the rest of Europe. The data reveals there are currently $144bn (£89bn) of equities out on loan to investors, down from $167bn two years ago and also its lowest level on record.
“Regulatory uncertainty has deterred some from engaging in short selling,” Markit director Alex Brog said.
“The muted borrowed demand today is the new reality. Over the last two years, we have seen a reduced appetite to short.”
Meanwhile data reviewed by Reuters shows some of the world’s top performing long and short equity funds are riding high this year.
John Armitage’s Egerton European Equity Fund, based in London, has gained more than 20 per cent, while the biggest fund at Larry Robbins’ Glenview Capital, based in the US, is up 31 per cent.
Lansdowne Partners’ Developed Markets Fund, which is considered Europe’s biggest long and short fund with $10bn under management, is also up 19.7 per cent.