Performance of hedge fund short trades in the Finnish stock market

Abstract

I examine the profitability of hedge fund short trades in Finnish equities. I also study short selling strategies producing abnormally high risk-adjusted returns. I do this by combining Finnish financial supervisory authority’s (FIN-FSA) data about short positions that are over 0.5% of the underlying company’s market cap with the companies’ return and returns of the factor portfolios. The factor portfolios used are Fama and French 3 and Carhart momentum. I find that hedge funds’ short trades are able to significantly outperform the market by 7 to 13 percent annually. I also divide the funds by their strategy depending on the amount of view they want to take on an individual company. I find that the funds that generally do not implement stock picking strategies, such as systematic equity strategies do not produce significant positive alphas. However, large wealth management companies’ funds are able to produce high positive alphas, as are the funds that generally exploit stock picking strategies, such as dedicated short funds.