Anticipatory Trading Against Distressed Mega Hedge Funds

51 Pages Posted: 9 Aug 2021 Last revised: 1 Feb 2022

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

George O. Aragon

Arizona State University (ASU) - Finance Department

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Kelsey D. Wei

University of Texas at Dallas

Date Written: January 31, 2022

Abstract

We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. Stocks that are anticipated to be sold by distressed MHFs next quarter experience greater selling by other institutions and elevated short interest in the current quarter. We also find that a one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutions trade ahead of the distressed trades of MHFs and destabilize stock prices.

Keywords: Hedge funds, Anticipatory trading, Front-running, Mega hedge funds, Fire sales

JEL Classification: G12, G20, G23

Suggested Citation

Agarwal, Vikas and Aragon, George O. and Nanda, Vikram K. and Wei, Kelsey D., Anticipatory Trading Against Distressed Mega Hedge Funds (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=3899627 or http://dx.doi.org/10.2139/ssrn.3899627

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://vagarwal.gsucreate.org/

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

George O. Aragon (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

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