Longs, Shorts, and the Cross-Section of Stock Returns

We study the cross-section of stock returns with observed short interest and long positions of hedge funds. During the period 1997-2014, 30% of highly shorted stocks also have the highest level of hedge fund holdings. Stocks with both high short interest and high hedge fund holdings do not earn abnormal returns, while stocks with high short interest but low hedge fund holdings or stocks with high hedge fund holding but low short interest exhibit significant abnormal returns. These return patterns are consistent with the notion that stock prices incorporate the expressed views of both the short sellers and active long investors. The evidence highlights that studies of informed trading such as short selling should not ignore the information from the opposite side