We provide direct evidence about the profitability of hedge fund short trades in equities. We identify the opening and closing of equity short sales (and long side trades) by hedge funds and
other institutional investors by combining data on the detailed transactions and holdings of the investors. Hedge fund short sales covered within five trading days are highly profitable, earning an average abnormal return of 14 bps per day, but short positions kept open longer than five days are not profitable. In contrast, non-hedge fund institutional investors suffer losses on short sales that are covered within five trading days but earn average abnormal returns of 2.6 bps per day on short trades covered between 21 and 63 days after being opened. Additional evidence suggests that some of the profitability of short trades is due to information and some stems from liquidity provision, and that short selling profitability is persistent.
JEL Classification: G12, G14, G23
Keywords: Hedge funds, short sale profitability, short sales, institutional investors
