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The Effectiveness of Short Selling

How Should Investors View Short Sales?

Short sellers often receive negative publicity when there is a market downturn, but is this really warranted? Are short selling bans (like those that have been implemented in response to the present crisis) effective? In order to understand these questions fully, it's necessary to look a little deeper into the practice of short selling.

Within this list of papers, there are several primers on short sales and the ways that they are used by the institutional investment community, including an explication of the popular 130/30 long-short equity strategy. Others look at short selling in the context of factor investing or the securities lending market. Speaking of securities lending, be sure to check out State Street's paper on the unique ESG-related conflicts between long-term investors and short-term securities lenders.

short sale

The Effectiveness of Short-Selling Bans (State Street, Apr 2020)

Will short selling bans succeed in reducing market declines as a result of the COVID-19 pandemic? State Street draws lessons from academic studies on previous short-selling bans.

The Intersection of Securities Lending and ESG Investing (State Street, 2020)

Can short selling practices undermine the ESG-related priorities of long-term investors? In this paper, State Street discusses this conflict, looking at issues such as short-termism and proxy voting.

Hedge Fund Strategy Outlook Q2 2020 (Franklin Templeton)

For compliance reasons, this paper is only accessible in certain geographies

Franklin Templeton's Q2 Hedge Fund Strategy Outlook has a section that covers long-short equity funds, delving even deeper into L-S funds focusing on the technology sector.

An Introduction to Short Selling (Managed Funds Association, 2018)

The Managed Funds Association produced this primer on short selling, providing details about the regulation of short sales and the benefits that short sales provide.

Short positions do not add value to factor investing strategies (Robeco, 2019)

This Robeco paper challenges the common assumption that factors can best be harvested by taking on both long and short positions. In their view, investors should focus on the long positions.

Improving Portfolio Diversification with Single Factor Indices (Scientific Beta, 2020)

Scientific Beta shows how a factor overlay approach (using long-short components) can help a portfolio to close the gap between its current and its target factor allocation.

The Long and the Short of It: The quant shorting advantage (QMA)

QMA describes the different routes to alpha that short-selling investors can take, examining the 3 predominant categories of shorting-enabled equity products - 130/30, market neutral, and other long short funds.

130/30 Long-Short Equity Strategies (Meketa, 2020)

How do 130/30 strategies work? This Meketa paper describes several aspects of 130/30 long-short strategies, including their risk/return characteristics.

Long-Short Equity Strategies - Hedging your bets (Morgan Stanley IM, Jan 2020)

In this prescient blog piece, Eric Stampfel of Morgan Stanley Investment Management describes some of the risk-mitigating aspects of long short strategies, specifically focusing on market neutral funds.

The Future of the Securities Lending Market (ISLA/Linklaters, 2019)

How have advancements in technology (including IR 4.0 disruptions) affected the securities lending market? This report describes potential changes in each stage of the securities lending life cycle.

The Institutional Investor Guide to Securities Lending (ISLA, 2019)

The International Securities Lending Association provides this helpful guide about securities lending, including information about short selling rules and the functions of short sales.