Hedge Funds are on the Ball When Insiders Trade

43 Pages Posted: 3 Dec 2019 Last revised: 6 Sep 2023

See all articles by Pouyan Foroughi

Pouyan Foroughi

York University - Schulich School of Business

Yixuan Rui

UNSW Australia Business School, School of Banking and Finance; Curtin University

Jerry T. Parwada

UNSW Business School; Financial Research Network (FIRN)

Jianfeng Shen

UNSW Business School, University of New South Wales

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2023

Abstract

This study examines the use of insider trading information by hedge funds. We find that hedge funds tend to trade in the same direction as insiders when insider trades are likely driven by information, while they do not respond to likely liquidity-driven insider trades. This finding is consistent with hedge funds deciphering profitable insider trading information. In contrast, mutual funds, pension funds, and other institutional investors (mostly banks and insurance companies) are more likely to trade in the opposite direction as insiders, acting as liquidity providers regardless of the insiders’ trading motives. Further, there is evidence that a hedge fund’s ability to exploit insider trading information helps improve its performance.

Keywords: Hedge funds, Insider trading

Suggested Citation

Foroughi, Pouyan and Rui, Yixuan and Rui, Yixuan and Parwada, Jerry T. and Shen, Jianfeng, Hedge Funds are on the Ball When Insiders Trade (August 14, 2023). Available at SSRN: https://ssrn.com/abstract=3488875 or http://dx.doi.org/10.2139/ssrn.3488875

Pouyan Foroughi

York University - Schulich School of Business ( email )

111 Ian MacDonald Blvd
North York, Ontario M3J 1P3
Canada

Yixuan Rui

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

Jerry T. Parwada

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Jianfeng Shen (Contact Author)

UNSW Business School, University of New South Wales ( email )

School of Banking and Finance
UNSW Sydney, NSW 2052
Australia

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