Hedge Funds are on the Ball When Insiders Trade

Abstract

This study examines the use of insider trading information by hedge funds. Exploiting the quarterly holdings data and daily transactions by institutional investors, we find evidence that hedge funds follow informed opportunistic insider trades after they become publicly known to market participants, while they do not respond to liquidity-driven insider trades. In contrast, mutual funds, pension funds, and other institutional investors (primarily banks and insurance companies) are more likely to trade in the opposite direction as insiders, regardless of the insiders’ trading motives. Further evidence shows that a hedge fund’s ability to exploit insider trading information helps improve its performance.

Keywords: Hedge funds, Insider trading