The Hard-Knock Life of Short Sellers

Low-quality stocks can outperform markets

February 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Short-biased hedge funds provided negative S&P 500 beta until 2011
  • Thereafter returns became less negatively correlated, but worsened
  • The strategy has generated limited diversification benefits for investors


Running a hedge fund is tough, but some types are tougher to manage than others. For example, an equity long-short fund benefits from a structurally rising stock market, which requires less skill than an equity market neutral fund where the market provides no help at all (read Market Neutral Funds: Powered by Beta?). Trying to provide pure alpha is like squeezing water from a stone.

The most difficult type of hedge fund is probably a short-biased one. The base expectation of the manager is to lose money as equity markets increase on average over time, so this strategy only works well when stocks crash or enter a bear market. Then, there is the hate of the investor community as most will hold long rather than short positions in stocks. The CEOs of companies have an even greater animosity to short-sellers as these are betting on the demise of their organizations, often with loudly publicized research reports that outline poor corporate strategies or even fraud. 

However, in years like 2022, when most stocks have lost money, investors’ interest in short-biased hedge funds tends to increase. Theoretically, these might be good diversifiers, but theoretically, hedge funds should be hedged, which most are not.

In this research article, we will explore the performance of short-biased hedge funds.


We use the Short Bias Index (HFRXSB) from HFR as a proxy for the performance of short-biased hedge funds. The index features monthly returns since 2005, so captures a variety of market and economic cycles.

Contrasting the short-biased hedge fund index to the S&P 500 highlights an almost asymmetrical performance, which is perhaps expected. The index’s performance has been poor and investing $1,000 in 2005 would only be worth $200 in 2022, i.e. investors would have experienced an 80% drawdown.