LQG Seminars

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Why Don’t Most Mutual Funds Short Sell … and what are the implications?

Seminar by Dong Lou

13th April 2021 – On-Line

An intriguing observation in the US mutual fund industry is that most equity funds do not short sell, despite that virtually all regulatory restrictions on short selling had been lifted by 1997. The analysis by Professor Lou and his co-authors Li An of Tsinghua PBC School of Finance, Shiyang Huang of the University of Hong Kong and Jiahong Shi of the London School of Economics sheds light on this puzzle by conducting the first systematic analysis of long-short equity funds’ portfolio compositions, fund performance, and capital flows.

The 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;
  3. long-short funds also face much higher flow-performance sensitivities and are more prone to use cash to absorb capital flows.

Professor Lou will discusses the implications and possible explanations for these findings.

Dong Lou

Associate Professor of Finance at the London School of Economics
and Research Fellow at the Centre for Economic Policy Research

Dong Lou is an Associate Professor of Finance at the London School of Economics and a Research Fellow at the Centre for Economic Policy Research. Professor Lou received a PhD in Financial Economics from Yale University in 2009, and earned an undergraduate degree in Computer Science from Columbia University in 2004. Professor Lou has published on a wide range of topics in top finance journals, and has received many awards for his research. His main research areas include asset pricing, investment management, and behavioural finance.