What is the interest rate charged to borrow those shares of RSP (shorting isn't free? Wouldn't that rate have to be subtracted from the 12%? And if there is any dividend distributed in the interim, that would have to be added to the 12%

True in both cases. The most recent short borrow rate appears to be 0.29%. Oddly low.

But you can think about it two ways. In one scenario, you have about that amount of cash sitting around that you'd like to earn more money on. It contributes indirectly to the pair trade as the spare margin security to the deal, but you do continue to earn interest on it throughout the deal, which offsets the borrow cost on the RSP. You're earning relatively close to [one time] 12% on that combo (cash+long+short), whereas without the deal you'd have been earning interest, say 3.7%/year.

The other way to look at it is that it's a "naked" deal standing on its own in addition to and conceptually separate from anything else in your portfolio. The Berkshire basically forming the security for the short. In that view you certainly have to subtract the borrow cost from any profit from the position, but on the other hand it's a maybe 9-11% return on incremental capital allocation of zero, so it's an infinite rate of return on the cash you committed to the deal : )

Of course, the weak point about this as "free money" notion isn't the precise number on the return, it's the notion that the trade will work. That Berkshire will, if not outperform the market, at least mean revert back to its recent market tracking level. The future hasn't happened yet.

Jim