Market Pain Is Someone's Gain

Research from America's best business schools.

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Short selling is one of the most controversial practices in financial markets. Borrowing a security and selling it, then repurchasing it later at a lower price is good for the seller but, it is argued, leads to volatility in the marketplace. Hedge funds are a target of short-selling accusations, especially when a hedge fund knows a mutual fund is struggling and needs to sell some holdings. But business professors at Harvard, the University of Southern California, and Princeton decided to see if hedge funds actually work this way when it comes to distressed mutual funds that are expected to lose value. In Do Hedge Funds Profit From Mutual-Fund Distress? out last month from the National Bureau of Economic Research, they find some evidence that shows hedge funds prosper when mutual funds are suffering: For example, hedge funds have higher returns at times when more mutual funds are going through financial difficulties. The authors point out, however, that it does not follow that hedge funds are harming mutual funds by profiting from their distress.