An Information Factor: What Are Skilled Investors Buying and Selling?
49 Pages Posted: 30 Jul 2018 Last revised: 24 Sep 2019
Date Written: September 22, 2019
We construct an information factor (INFO) using the informed stock buying of corporate insiders and the informed selling of short sellers and option traders. INFO strongly predicts future stock returns -- a long-short portfolio formed on INFO earns monthly alphas of 1.24%, substantially outperforming existing strategies including momentum. INFO explains hedge fund returns in the time-series and cross-section. Higher values of INFO are associated with increases in aggregate hedge fund value. Moreover, funds with higher covariation between their returns and INFO outperform by 0.28% per month. The results show information processing skill is an important source of return variation.
Keywords: Informed Trading, Insider Trading, Short Selling, Option Trading, Hedge Funds
JEL Classification: G11, G12, G14, G17, G23
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