The divergences are “consistent with SSs profiting from MF-induced price reversals” and “strongly suggest that SSs are able to detect and capitalize on MF trading activity,” the authors said.
The research paper reveals that short sellers profit from the predictability in mutual fund trading patterns. The wealth transfer from mutual funds to short sellers is also most noticeable in companies with large sizable shares of mutual fund institutional positions and low overall liquidity. Additionally, during periods of increased retail sentiment or higher retail flows, the transfer of wealth is intensified.
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