Health-Care Expertise Paid Off for Covid-19 Short Sellers

The success of short sellers during the pandemic appears tied to their health-care expertise and information processing skills, according to a paper from researchers in Germany and Australia.

The Covid-19 pandemic is a “health-care crisis by nature,” making health-care-related information valuable across industries and a competitive edge for some short sellers, said Karlsruhe Institute of Technology researchers Levy Schattmann and Jan-Oliver Strych and University of Sydney business school professor Joakim Westerholm in apaper this month. They found short sellers with health-care expertise outperformed a control group that lacked it in their general market trading.

The study drew from a German sample of daily short-selling data from November 1, 2012 through June. The researchers covered 266 different short sellers and 214 different stocks, “including a range of well-known brokers and hedge funds like J.P. Morgan or Renaissance Technologies,” according to the paper.

As volatile markets moved fast last year as a result of the Covid-19 pandemic, short sellers’ health-care expertise and ability to process aggregate information became more important to producing superior returns than having insight into specific companies, the researchers found.

“We find overwhelming evidence that health-care expertise causes market-wide outperformance in the Covid-19 pandemic,” the researchers said. “Expertise traders possess superior processing skills in Covid-19 markets, as health-care information is then also relevant for non-health-care stocks.”

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The value of health-care expertise is “economically significant,” the study showed.

For example, the researchers looked at 10-day cumulative abnormal returns and found short sellers with health-care expertise beat their control group “post-shock” by 4.3 percent when evaluating general shorting performance. The outperformance widened to 7.2 percent “when applying the covering performance to identify health-care expertise,” the researchers said.

Short sellers with health-care expertise also had superior performance over five-day and 20-day windows measuring cumulative abnormal returns.

“Outperformance is persistent within our measured return windows, and expertise traders increase their alpha as their holding periods lengthen,” the authors said.