A recent paper examines simultaneous changes in stock holdings and short interest to gauge the true “informed” nature of hedge fund managers.
The long and short of it: Informed long demand refers to stocks whose aggregate hedge fund ownership increased and short interest decreased; the opposite pattern represents informed short demand. Equal- and value-weighted portfolios of top-quartile stocks fitting these criteria exhibited abnormal returns in the next quarter of 2.5% and 2.1%, respectively. Returns were adjusted for size, book-to-market ratio and momentum. Although performance decays in subsequent quarters, it does not reverse.
Predictive value: Informed demand can predict stocks' fundamentals such as return on assets, earnings surprises, analyst revisions and market responses to unexpected fundamentals.
*Note: 't' denotes the quarter in which the portfolio was constructed. Source: “Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand,” by Yawen Jiao, Massimo Massa, Hong Zhang
Compiled and designed by Timothy Pollard and Gregg A. Runburg