Identifying Skilled Managers: Evidence From Mutual Fund Short Sales
In this paper, the authors provide a first look at the short positions established by 75 mutual funds that used short sales of US domestic stocks as an investment strategy. They document that mutual funds tend to establish short positions in the larger and more liquid stocks, likely to minimize the possibility of a short squeeze. They also find that the shorted stocks have low equity BM ratios, higher total accruals, and higher prior sales growth, and that the shorted stocks earn an abnormal return of between -3.3% and -9.1% on an annualized basis. This suggests that the fund managers are able to use valuation and financial indicators and identify stocks that do poorly.