Informed Trading by Hedge Funds

38 Pages Posted: 18 Aug 2017 Last revised: 2 May 2019

See all articles by Qiping Huang

Qiping Huang

Boise State University - College of Business & Economics

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Date Written: April 30, 2019

Abstract

Using daily equity transactions, we create a hedge fund informed trading measure (ITM) that separates information related trades from liquidity driven trades. We find that stocks with higher hedge fund informed trading are associated with higher future stock performance. The long-short portfolio delivers 4% annual alpha after controlling for size, value, momentum, and illiquidity factors. The results are mainly driven by the long side of informed trading. We attribute the informed trading to funds' ability to identify and correct stock underpricing. The results are robust to various ways of constructing and sorting the measure, and we do not find a return reversal in 4 quarters, indicating that the measure is information related.

Keywords: Hedge Funds, Informed Trading, Stock Mispricing

JEL Classification: G11, G12, G14, G23

Suggested Citation

Huang, Qiping and Jain, Pankaj K., Informed Trading by Hedge Funds (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=3021425 or http://dx.doi.org/10.2139/ssrn.3021425

Qiping Huang (Contact Author)

Boise State University - College of Business & Economics ( email )

United States

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

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