Do Short-Sellers Profit from Mutual Funds? Evidence from Daily Trades

Daily mutual fund (MF) flows are highly persistent and price-destabilizing, and short-sellers (SSs) trade strongly in the opposite direction to these flows. This negative relation is associated with the expected component of MF flows (based on prior days’ trading), as well as the unexpected component (based on same-day flows). The ability of SS trades to predict stock returns is up to 3 times greater when MF flows are in the opposite direction. The resulting wealth transfer from MFs to SSs is most pronounced for high-MF-held, low-liquidity firms, and is much larger during periods of high retail sentiment.