On the Role of Trading vs. Holdings in the Performance Persistence of Institutional Investors: The Value of Regular Trading

Abstract

We use institutional transaction data to estimate the contribution of trading compared to holdings in the performance of institutional stock investors. Trading contributes positively to performance, and funds that trade regularly drive evidence of persistence among outperforming funds. By contrast, holdings contribute negatively to fund performance and drive persistence in underperforming funds. We find that funds that trade regularly generate greater performance during periods of market uncertainty, as reflected in elevated levels of VIX, whereas holdings show greater underperformance during periods of market stability. Aside from these effects, evidence of persistence in institutional investor performance weakens considerably.

Keywords: Institutional investors, Performance persistence, Trading regularity