The Information in Industry-Neutral Self-Financed Trades
66 Pages Posted: 4 May 2020 Last revised: 25 Aug 2021
Date Written: April 29, 2020
We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) by long only fund managers who possess a positive short-horizon private signal. Stock purchases financed by equivalent dollar-denominated stock sales in the same industry are classified as informed by INSFIT. Despite constituting a small fraction of their trading activity, 37% of short-term fund trading profits are attributable to INSFIT. INSFIT also precedes more frequent and positive media coverage for the firms being bought. Relative valuation as well as the need to hedge industry exposure motivate INSFIT’s industry neutrality. Furthermore, INSFIT occurs more frequently among cash-constrained managers but is uncorrelated across fund managers. Although INSFIT involves relatively large dollar-denominated trades, transaction costs cannot account for its profitability.
Keywords: Informed Trading, Self Financing, Industry Neutral, Institutional Investors, Manager Skills
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation