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Journal of Financial Economics 122 (2016) 544–567
Contents lists available at ScienceDirect
Journal of Financial Economics
journal homepage: www.elsevier.com/locate/jfec
Short selling meets hedge fund 13F: An anatomy of informed demandR
Yawen Jiaoa, Massimo Massab, Hong Zhangc,∗
a School of Business Administration, University of California, Riverside, Anderson Hall 0129, 900 University Avenue, Riverside, CA 92521, USA
b INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France
c PBC School of Finance, Tsinghua University, 43 Chengfu Road, Haidian District, Beijing 100083, PR China
article info
Article history:
Received 16 August 2015
Revised 30 November 2015 Accepted 29 January 2016
Available online 16 September 2016
JEL codes:
G20 G14
Short selling Hedge funds
Informed demand Hedging
1. Introduction
Hedge funds are known to both buy and short sell stocks on a large scale. Changes in hedge fund holdings and fluctuations in short interest are therefore largely two facets of the same phenomenon: hedge fund trading.1 The
R We would like to thank Douglas Breeden, Charles Cao, Hui Chen, Bernard Dumas, Philip Dybvig, Paul Gao, Zhiguo He, John Griffin, Marias- sunta Giannetti, Zhiguo He, Pierre Hillion, Soren Hivkiar, Jennifer Huang, Marcin Kacperczyk, Bing Liang, Dong Lou, Stavros Panageas, Lubos Pas- tor, Neil Pearson, Lasse Pedersen, Philip Strahan, Nagpurnanand Prabhala, David Reeb, Matthew Spiegel, Hao Zhou, Lu Zheng and seminar partici- pants at CKGSB, INSEAD, National University of Singapore, and PBC School of Finance.
∗ Corresponding author. Fax: +86-10 6279 9557.
E-mail addresses: yawenj@ucr.edu (Y. Jiao), massimo.massa@
insead.edu (M. Massa), zhangh@pbcsf.tsinghua.edu.cn (H. Zhang).
1 The recent attack of foreign-listed Chinese stocks, which leads the Bloomberg China Reverse Merger Index tracking 82 NYSE-listed Chinese
0304-405X/© 2016 Elsevier B.V. All rights reserved.
The existing literature treats the short side (i.e., short selling) and the long side of hedge fund trading (i.e., fund holdings) independently. The two sides, however, complement each other: opposite changes in the two are likely to be driven by information, whereas si- multaneous increases (decreases) of the two may be motivated by hedging (unwinding) considerations. We use this intuition to identify informed demand and document that it exhibits highly significant predictive power over returns (approximately 10% per year). We also find that informed demand forecasts future firm fundamentals, suggesting that hedge funds play an important role in information discovery.
© 2016 Elsevier B.V. All rights reserved.
literature, however, treats these two variables separately, as if they were independent phenomena. For instance, the short selling literature investigates whether short sellers are informed and whether they can help improve price efficiency (e.g., Senchack and Starks, 1993; Asquith and Meulbroek, 1995; Aitken, Frino, McCorry, and Swan, 1998;
companies to have “tumbled 68% from its peak at the start of 2010” (Fi- nancial Times, April 10, 2012), illustrates the important role that hedge funds play in the short selling market (see Ljungqvist and Qian, 2014, for details). Indeed, the notion that hedge funds take both long and short positions at a large scale is widely supported by practitioners. Barclay- Hedge, for instance, claims that the long–short strategy of “taking long positions in stocks that are expected to increase in value and short posi- tions in stocks that are expected to decrease in value” is “used primarily by hedge funds” and that “hedge funds ... simply do this on a grander scale” (www.barclayhedge.com). Goldman Sachs has estimated in its re- port “Hedge fund trend monitor” that hedge funds accounted for 85% of total short interest positions, or $361 billion, as of December 31, 2009.

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