A First Look at Mutual Funds That Use Short Sales

Abstract

We provide a first look at short selling by mutual funds, a phenomenon not examined by prior research. Mutual funds that short do so frequently and in significant amounts, averaging about 16% of fund assets. These funds outperform benchmarks by 1.5% per year. An analysis of portfolio holdings shows that these funds generate abnormal performance from their short (4.1% per year) and long (1.5% per year) positions. Managers of short-selling mutual funds also exhibit superior performance in other funds they manage that do not use short sales. These findings suggest that managers of short-selling mutual funds are skilled.