Informationless Trading

46 Pages Posted: 4 Nov 2008

See all articles by Stephen J. Brown

Stephen J. Brown

New York University - Stern School of Business

David R. Gallagher

Rozetta Institute

Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); APG All Pensions Group

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004


The recent paper by Goetzmann et al. (2002) suggests that fund managers subject to a performance review have an adverse incentive to engage in portfolio strategies that have the unfortunate attribute that they can expose the fund investor to significant downside risk. Weisman (2002) uses the term â¬Sinformationless investingâ¬? to describe this behavior, and argues that these strategies are â¬Speculiar to the asset management industry in general, and the hedge fund industry in particularâ¬? and that these strategies â¬Scan produce the appearance of return enhancement without necessarily providing any value to an investor.â¬? Just how prevalent are these practices in the fund management business? On the basis of a unique database of daily transactions and holdings of a set of forty successful Australian equity managers, we find evidence that individual managers do engage in this trading behavior, particularly when they form part of a team within a large decentralized money management operation and are compensated in the form of an annual bonus based on performance. This result is broadly consistent with the theoretical and empirical results of the principal agent literature which highlight the adverse consequences for the long term objectives of principals where agents are compensated based on observable short term performance. It is also consistent with recent results from the behavioral finance literature which suggest that agents narrowly focus on individual security gambles independent of overall portfolio value considerations.

Keywords: Informationless Trading, Sharpe Ratios, Performance Evaluation

Suggested Citation

Brown, Stephen J. and Gallagher, David R. and Steenbeek, Onno W. and Swan, Peter Lawrence, Informationless Trading (January 2004). NYU Working Paper No. SC-AM-04-01, Available at SSRN:

Stephen J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

David R. Gallagher

Rozetta Institute ( email )


Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Dept. of Finance, E2-28
P.O. Box 1738
3000 DR Rotterdam, 3000DR


APG All Pensions Group ( email )

Gustav Mahlerplein 3
P.O. Box 75283
1070 AG Amsterdam
+31-20-6049122 (Phone)
+31-20-4059176 (Fax)


Peter Lawrence Swan

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

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Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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