Identifying skilled managers: Evidence from mutual fund short sales

摘要

In this paper, we 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. We 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. We 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. We use the portfolio holdings data and show that the mutual funds earn significant abnormal returns on both the short and the long portfolios. The average alpha for the short portfolio (using the Carhart (1997) four-factor model) ranges between 4.8% and 5.9% on an annualized basis. The corresponding abnormal return on the long portfolio ranges between 1.9% and 2.6%. Using a total net assets-matched control fund approach, the incremental alpha ranges between 2.9% to 4.1% annually. Overall, the result that mutual fund managers using short sales exhibit superior performance is consistent with the theoretical prediction (e.g., Diamond and Verrecchia (1987)) that only informed investors will sell short.