活動內容

Topic

Why Don't Most Mutual Funds Short Sell?

Speaker

Li An

Assistant Professor, PBC School of Finance, Tsinghua University

Abstract

One of the most puzzling observations of the US money management industry is that most equity mutual funds do not short sell—despite the obvious benefits of short selling to both fund investors and market efficiency. We shed light on this puzzle by constructing a novel dataset of mutual funds’ long/short positions, cash holdings, and capital flows from public SEC filings. Our analyses show that a) long-short mutual funds hold substantially more cash than their traditional long-only peers (30% vs. 5%); b) because of this cash dilution, long-short mutual funds underperform their long-only peers, although their risky holdings generate significant alpha (of 2-3% per annum). Moreover, c) long-short mutual funds face substantially stronger flow-performance relations (and consequently more volatile flows) and are much more prone to using cash holdings to absorb capital flows. Building on these results, we propose a novel explanation for the lack of growth of long-short mutual fund products, drawing on the coexistence of sophisticated and unsophisticated retail investors.