Quant investing, and indeed much of the hedge fund industry, is built on the power and freedom that come with the ability to sell short. When you short a security (borrow and then sell it, meaning you make money if the price falls and you then re-buy it), you can profit when markets go down as well as up. Hedge funds, unlike mainstream mutual funds, can sell short, and this opens exciting new strategies. In 2000 and 2001, as the dot-com bubble was bursting, equity hedge funds succeeded in making money, and many investors noticed. “Liquid alts” — hedge fund-like strategies on offer to retail investors — tend to be based on this, as is much of the emerging work in “smart beta” — tweaking well-known indexes to emphasize particular factors.
More here – Bloomberg
PS: Academics are always late to the party. Almost two decades ago our systems testing maestro Scott L did some interesting work that showed how the performance of our equity systems improved if short selling were dropped as a strategy. Since we are evidenced-based it was dropped instantly.
