A First Glimpse into the Short Side of Hedge Funds

65 Pages Posted: 24 Jun 2016 Last revised: 20 Mar 2017

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Ji Min Park

University of Illinois at Urbana-Champaign - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Shastri Sandy

The Brattle Group

Date Written: March 16, 2017

Abstract

We provide direct evidence about the profitability of hedge fund short trades in equities. We identify the opening and closing of short (and long) trades by combining data on institutional investors’ transactions and holdings. Hedge fund short sales covered within five trading days are highly profitable, but short positions kept open longer than five days are not. Other institutional investors’ short sales are not profitable. Additional evidence suggests that some of the profitability of short trades is due to trading on information and some stems from liquidity provision in both opening and covering trades. Short selling profitability is persistent.

Keywords: Hedge funds, short sale profitability, short sales, institutional investors

JEL Classification: G12, G14, G23

Suggested Citation

Choi, Jaewon and Park, Ji Min and Pearson, Neil D. and Sandy, Shastri, A First Glimpse into the Short Side of Hedge Funds (March 16, 2017). HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital. Available at SSRN: https://ssrn.com/abstract=2799423 or http://dx.doi.org/10.2139/ssrn.2799423

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Ji Min Park

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Neil D. Pearson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Shastri Sandy

The Brattle Group ( email )

44 Brattle St
Cambridge, MA MA 02138
United States
312-315-8395 (Phone)

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