Paul Cooper, 42, of Walton Road in Heywood, Greater Manchester, was found at his flat on 18 March.
Neil Read, 23, of Higher Lomax Lane in Heywood, was deemed unfit to plead earlier this week.
On Friday he was ordered to go to Ashworth high security hospital, where he will be held in a psychiatric unit.
He is to be held without limit of time.
Read attacked and killed Mr Cooper after becoming fixated with the idea he had been indecently assaulted by him when he was a child.
Det Ch Insp Jeff McMahon said: "Paul and Read knew each other from years earlier.
"We have never received any allegation that Paul indecently assaulted Read at any time.
"There is no evidence to suggest that Paul was ever involved in any sexual offence.
"He had never been arrested, questioned or convicted of any crime of a sexual nature.
"Neil Read had, over a prolonged period of time, persuaded a number of people in the community that Paul Cooper, and others in the area, were sex offenders. "Many of those he spoke to believed him and this misinformation hampered our investigation in its early stages."
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