Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand

33 Pages Posted: 16 Mar 2015

See all articles by Yawen Jiao

Yawen Jiao

University of California, Riverside

Massimo Massa

INSEAD - Finance

Hong Zhang

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

Abstract

The existing literature treats the short side (i.e., short selling) and long side of hedge fund trading (i.e., changes in holdings) independently. The two sides, however, complement each other in revealing important economic motivations of trading: opposite changes in short interest and hedge fund holdings are likely to be driven by information, whereas simultaneous increases (decreases) in short interest and hedge fund holdings may be motivated by hedging (unwinding) considerations. We use this intuition to identify informed demand, and document that it exhibits highly significant predictive power on returns: stocks with informed long demand can outperform stocks with informed short demand by approximately 10% per year. We also find that informed demand forecasts future firm fundamentals (e.g., ROA, earnings surprise, analyst revision) but that it is less related to mutual fund flows or liquidity provision. These findings suggest that information discovery about firm fundamentals could be among the most important drivers for informed demand.

Keywords: short-selling

JEL Classification: G23

Suggested Citation

Jiao, Yawen and Massa, Massimo and Zhang, Hong, Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand (March 2015). CEPR Discussion Paper No. DP10471. Available at SSRN: https://ssrn.com/abstract=2575775

Yawen Jiao (Contact Author)

University of California, Riverside ( email )

Riverside, CA 92521
United States

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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