Dissecting Short-Sale Performance: Evidence from Large Position Disclosures

Abstract

Short sellers are perceived as informed, sophisticated investors. Yet little is known about their actual performance and trading strategies. Using a novel, hand-collected data set of daily position disclosures in Europe, we identify the entry, change, and exit dates of large short-sale positions for a wide cross section of stocks and investors. We find that hedge funds, the predominant investor group, generate an annualized Fama and French (1993) risk-adjusted return of about 5.5%, outperforming other investors. Evidence indicates that hedge funds act as arbitrageurs, generating their returns by trading on the mispricing-related factors, e.g. momentum, betting-against-beta, and quality-minus-junk. In the cross section of hedge funds, local, diversified, and active funds outperform their counterparts. On the position level, we document a first-mover advantage. The profitability of short sales also varies significantly with investors' holding period, location, and industry experience.