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Why don't most mutual funds short sell?

Author

Listed:
  • Li, Li
  • Huang, Shiyang
  • Lou, Dong
  • Shi, Jiahong

Abstract

An intriguing observation in the US mutual fund industry is that most equity funds do not short sell, even though virtually all regulatory restrictions on short selling had been lifted by 1997. We shed light on this puzzle by conducting the first systematic analysis of long-short equity funds' portfolio compositions, fund performance, and capital flows. Our results reveal that: 1) long-short mutual funds hold substantially more cash than their long-only peers and have a market beta significantly below one; 2) long-short funds generate a large positive alpha of 5% a year in risky holdings but slightly underperform their long-only peers in total returns; and 3) long-short funds face much higher flow-performance sensitivities and are more prone to use cash to absorb capital flows. We discuss several possible explanations for these findings.

Suggested Citation

  • Li, Li & Huang, Shiyang & Lou, Dong & Shi, Jiahong, 2021. "Why don't most mutual funds short sell?," LSE Research Online Documents on Economics 118854, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118854
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    File URL: http://eprints.lse.ac.uk/118854/
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    long-short equity mutual funds; cash holdings; portfolio beta; fund performance; flow-performance relations;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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