The Information in Industry-Neutral Self-Financed Trades
Journal of Financial & Quantitative Analysis, Forthcoming
63 Pages Posted: 4 May 2020 Last revised: 9 May 2023
Date Written: June 21, 2022
Abstract
We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) as stock trades financed by offsetting, equivalent dollar-denominated stock trades in the same industry. Approximately 37% of short-term mutual fund trading profits can be attributed to these trade pairs. Consistent with informed trading, INSFIT precedes unusually high media coverage for the underlying stocks. The trades underlying INSFIT are also larger as the release of stock-level news becomes more imminent. Both relative valuation and the hedging of industry exposure motivate INSFIT’s industry neutrality. While INSFIT positively impacts fund performance, active fund managers who execute INSFIT more aggressively obtain smaller trading profits per execution.
Keywords: Informed Trading, Self Financing, Industry Neutral, Institutional Investor Skill
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation