Evidence from detailed hedge fund portfolio data
Should short positions be considered as negative long positions? How does short selling differ from long investment?
Are shorts just negative longs? is an academic paper co-authored by Sandro Lunghi from Inalytics and Bastian von Beschwitz from the Federal Reserve Board, which explores these questions.
Using the Inalytics Peer Group database, which comprised of 21 long-short hedge funds from 2005 to 2015, the co-authors explore the differences in decision making when trading long and short positions.
The paper finds that long buys and short sells are informed, but that long sells and short buys are uninformed. In fact, it the authors find that it is possible to generate significant alphas by taking the opposite trades to long sells and short buys. This implies that hedge funds close their positions too early and “leave money on the table”. Furthermore, while hedge funds trade on momentum when trading both long and short positions, subsequent orders exhibit a momentum bias for shorts and contrarian bias for longs. We argue this comes from hedge funds’ desire to keep their position sizes stable.
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