A First Look at Mutual Funds That Use Short Sales

46 Pages Posted: 12 Mar 2008 Last revised: 12 Jan 2012

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

Hemang Desai

Southern Methodist University (SMU) - Accounting Department

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2012

Abstract

The use of short sales by mutual funds has increased significantly over the last decade. In this paper, we provide a first look at short selling by mutual funds, a phenomenon not examined by prior research. The mutual funds that use short sales do so frequently and in significant amounts, averaging about 16% of fund assets. We find that mutual funds that use short sales outperform size-matched control funds by a risk-adjusted 1.5% per year, suggesting that managers using short sales are skilled. The results are similar when we use style and size-matched funds. Using detailed portfolio holdings data, we show that mutual funds that use short sales generate abnormal performance from both their short (4.1% per year) and long (1.5% per year) positions. Furthermore, fund managers who use short sales exhibit superior performance in other funds they manage that do not use short sales. Our findings thus suggest that managers of mutual funds that use short sales appear to possess skill.

Keywords: Mutual fund, Performance evaluation, Short sales

JEL Classification: G2, G12, G14

Suggested Citation

Chen, Honghui and Desai, Hemang and Krishnamurthy, Srinivasan, A First Look at Mutual Funds That Use Short Sales (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=1105226 or http://dx.doi.org/10.2139/ssrn.1105226

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Hemang Desai

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3185 (Phone)
214-768-4099 (Fax)

Srinivasan Krishnamurthy (Contact Author)

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
575
rank
44,512
Abstract Views
2,471
PlumX Metrics