- 1Heavily shorted stocks underperform by ~15% annually (risk-adjusted)
- 2The signal comes almost entirely from institutional short sellers
- 3Retail short selling has zero predictive power
- 4Short sellers are most accurate in stocks with high information asymmetry (small caps, hard-to-value firms)
- 5This validates using "Days to Cover" and "Short Interest Ratio" as negative factors
#The Paper at a Glance
Title: Which shorts are informed?
Authors: Ekkehart Boehmer, Charles M. Jones, and Xiaoyan Zhang
Published: Journal of Finance, 2008
DOI: 10.1111/j.1540-6261.2008.01324.x
Using a proprietary NYSE dataset that distinguished between account types (Individual vs. Institution vs. Market Maker), the authors finally answered the question: Who is the smart money?
The results were stark. Institutional short sellers (hedge funds) possess private information and superior analytical models. When they short a stock, it drops. When retail investors short a stock, nothing happens (or it goes up).
#The Magnitude of the Signal
A portfolio that went long stocks with low institutional shorting and short stocks with high institutional shorting earned 15.6% annual alpha.
This is one of the largest premiums documented in finance—larger than Value, Momentum, or Size.
Why Is It So Strong?
Short selling is expensive and risky. - You pay borrowing costs. - Your losses are theoretically infinite. - You face squeeze risk.
Because the barriers to entry are so high, only investors with high conviction and superior information are willing to play. This filters out the noise traders, leaving a pure signal of negative information.
#How This Applies to Our Rankings
We use Short Interest Ratio (Days to Cover) and Short % of Float as key inputs in our Short Interest factor (10% weight).
While we can't see the proprietary breakdown (Institution vs. Retail) in real-time public data, high short interest in the modern market is almost always driven by institutions (retail capital is too small to move these ratios significantly for most stocks).
Therefore, we treat high short interest as a major warning sign. Even if a stock looks cheap and profitable, if 20% of the float is short, we penalize it heavily. We respect the collective intelligence of the short-selling community.
See stocks with low short interest →
#Academic Source
Boehmer, E., Jones, C. M., & Zhang, X. (2008). "Which shorts are informed?" Journal of Finance, 63(2), 491-527.
Last updated: February 9, 2026