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A First Look at Mutual Funds That Use Short Sales

Published online by Cambridge University Press:  31 May 2013

Honghui Chen ,
Hemang Desai  and
Srinivasan Krishnamurthy
Honghui Chen
Affiliation:
honghui.chen@bus.ucf.edu, College of Business Administration, University of Central Florida, PO Box 161400, Orlando, FL 32816
Hemang Desai
Affiliation:
hdesai@smu.edu, Cox School of Business, Southern Methodist University, PO Box 750333, Dallas, TX 75275
Srinivasan Krishnamurthy
Affiliation:
srini_krishnamurthy@ncsu.edu, Poole College of Management, North Carolina State University, Campus Box 7229, Raleigh, NC 27695
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Abstract

We provide a first look at short selling by mutual funds, a phenomenon not examined by prior research. Mutual funds that short do so frequently and in significant amounts, averaging about 16% of fund assets. These funds outperform benchmarks by 1.5% per year. An analysis of portfolio holdings shows that these funds generate abnormal performance from their short (4.1% per year) and long (1.5% per year) positions. Managers of short-selling mutual funds also exhibit superior performance in other funds they manage that do not use short sales. These findings suggest that managers of short-selling mutual funds are skilled.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 761 - 787
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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