In this study, the researchers from the Bejiing School of finance exploit the information contained in the joint analysis of the long and short sides of hedge fund trading. They state that opposite changes in short interest and hedge fund holdings are likely driven by information, whereas simultaneous increases (decreases) in short interest and hedge fund holdings are likely motivated by hedging (unwinding) incentives. This intuition allows to utilize short selling and hedge fund holding information to identify informed long and short demand.
Using this identification strategy, the researchers show that informed demand changes have high predictive power for returns.
Read the full study here