The Decline in Performance of Institutional Investors

Abstract

Institutions’ aggregate performance has declined over time (Lewellen 2011). Conventional wisdom suggests this is because institutions are increasingly trading with each other. Our analysis of the time series of institutional trade performance rejects this conventional wisdom. The increase in institutional holdings is gradual whereas the decline in performance is abrupt (structural shift in 2000). Moreover, the decline in performance is due to a decline in profitability of trades with non-institutional counterparties rather than volume of trades with non-institutional counterparties. Our evidence suggests events around the year 2000 (decimalization, Reg-FD, listings) impacted the relative informedness of institutions, retail investors, and firms.

Keywords: Institutional Investors, Counterparties, Individual Investors, Performance, Reg FD

JEL Classification: G23, G14