On the Other Side of Hedge Fund Equity Trades

Abstract

Hedge funds earn positive ex-post abnormal returns and avoid negative abnormal returns on their equity portfolios when trading in the opposite direction of highly-diversified low-turnover institutional investors (quasi-indexers). This pattern is pronounced for short- and long-term holding periods, as well as if trading is conditional on return predictability associated with well-known market anomalies. It seems to be driven by the preferences of quasi-indexers for liquid, high-market-beta stocks, which tend to exhibit low future abnormal returns. Trading against other institutional investors or non-institutions does not result in abnormal performance for hedge funds.

Keywords: Institutional Trading, Alpha, Market Beta, Market Anomalies, Quasi-Indexers, Hedge Funds

JEL Classification: G12, G14, G23