Short Selling Shows Alpha In Mutual Funds

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Executive Summary

Hedge funds have historically used short selling as a trading strategy, while mutual funds have generally not permitted the practice. But, mutual funds are increasingly allowing their managers to engage in short selling as an investment strategy, growing from 23% in 1994 to 60% in 2006, though only 7% actually practiced shorting. The author reveals the first evidence that the mutual fund managers who engage in short selling exhibit superior performance or skill. A great number of studies have found that, on average, mutual fund managers do not beat passive benchmarks such as the S&P500 index. Thus, it is difficult to identify skilled mutual fund managers, ex-ante or in advance.

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