Hostname: page-component-8448b6f56d-dnltx Total loading time: 0 Render date: 2024-04-23T10:54:46.345Z Has data issue: false hasContentIssue false
  • English
  • Français

The Performance of Short-Term Institutional Trades

Published online by Cambridge University Press:  29 June 2017

Bidisha Chakrabarty ,
Pamela C. Moulton  and
Charles Trzcinka
Get access Rights & Permissions [Opens in a new window]

Abstract

Using a database of daily institutional trades, we document that a majority of short-term institutional trades lose money. In aggregate, over 23% of round-trip trades are held for less than 3 months, and the returns on these trades average -3.91% (nonannualized). These losses are pervasive across all types of stocks, with the lowest returns occurring in small stocks, value stocks, and low-momentum stocks. Short-term trades lose more in more volatile markets. Across funds, the worst short-term returns accrue to funds that do the most trading, and there is no evidence of persistent skill or disposition effect in short-term institutional trades.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 4 , August 2017 , pp. 1403 - 1428
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Amber Anand, James Angel, Warren Bailey, Robert Battalio, Azi Ben-Rephael, Stephen Brown (the editor), Martijn Cremers (the referee), Luis Goncalves-Pinto, Jeff Harris, Craig Holden, Paul Irvine, Ravi Jain, Bob Jennings, David Jessop, Peter Lerner, Qing Ma, Maureen O’Hara, Kevin Mullally, Anna Obizhaeva, Ajay Patel, Gideon Saar, Sophie Shive, Andriy Shkilko, Anthony Trzcinka, Konstantin Tyurin, Kelsey Wei, Russ Wermers, and seminar participants at Cornell University, Indiana University, Syracuse University, the University of Notre Dame, the 2012 India Finance Conference, the 2013 Finance Down Under Conference, the 2013 Financial Management Association Conference, the 2014 European Finance Association Conference, and the 2014 UBS Equities Quantitative Investment Conference for helpful comments. We also thank Zhi Da for the Daniel, Grinblatt, Titman, and Wermers (1997) benchmark returns; John Hallinger and Andy Puckett for advice on the Ancerno data; Jeff Bacidore for insights into institutional trading; Yifei Mao for research assistance; and Ancerno Ltd. for providing data.

References

Amihud, Y.“Illiquidity and Stock Returns: Cross Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Anand, A.; Irvine, P.; Puckett, A.; and Venkataraman, K.. “Institutional Trading and Stock Resiliency: Evidence from the 2007–2009 Financial Crisis.” Journal of Financial Economics, 108 (2013), 773–797.Google Scholar
Asness, C. S.; Moskowitz, T. J.; and Pedersen, L. H.. “Value and Momentum Everywhere.” Journal of Finance, 68 (2013), 929–985.CrossRefGoogle Scholar
Ben-David, I., and Hirshleifer, D.. “Are Investors Really Reluctant to Realize Their Losses? Trading Responses to Past Returns and the Disposition Effect.” Review of Financial Studies, 25 (2012), 2485–2532.Google Scholar
Berk, J. B., and van Binsbergen, J. H.. “Measuring Skill in the Mutual Fund Industry.” Journal of Financial Economics, 118 (2015), 1–20.Google Scholar
Boehmer, E., and Kelley, E.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 3563–3594.Google Scholar
Bushee, B. J.“Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.Google Scholar
Bushee, B. J., and Noe, C. F.. “Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility.” Journal of Accounting Research, 38 (2000), 171–202.Google Scholar
Busse, J.; Goyal, A.; and Wahal, S.. “Performance and Persistence in Institutional Investment Management.” Journal of Finance, 65 (2010), 765–790.Google Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 1607–1648.Google Scholar
Chaudhuri, R.; Ivkovic, Z.; and Trzcinka, C.. “Strategic Performance Allocation in Institutional Asset Management Firms: Behold the Power of Stars and Dominant Clients.” Review of Financial Studies, forthcoming (2017).Google Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity and Market Quality.” Journal of Financial Economics, 101 (2011), 243–263.Google Scholar
Chung, K. H., and Zhang, H.. “Corporate Governance and Institutional Ownership.” Journal of Financial and Quantitative Analysis, 46 (2011), 247–273.Google Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Cremers, M., and Pareek, A.. “Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently.” Journal of Financial Economics, 122 (2016), 288–306.CrossRefGoogle Scholar
Cremers, M.; Pareek, A.; and Sautner, Z.. “Stock Duration, Analyst Recommendations, and Misevaluation.” Working Paper, University of Notre Dame (2014).Google Scholar
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 1035–1058.Google Scholar
Dow, J., and Gorton, G.. “Noise Trading, Delegated Portfolio Management, and Economic Welfare.” Journal of Political Economy, 105 (1997), 1024–1050.Google Scholar
Fama, E., and French, K.. “Luck versus Skill in the Cross Section of Mutual Fund 𝛼 Estimates.” Journal of Finance, 65 (2010), 1915–1947.Google Scholar
Ferreira, M., and Matos, P.. “The Colors of Investors’ Money: The Role of Institutional Investors around the World.” Journal of Financial Economics, 88 (2008), 499–533.Google Scholar
Fong, K.; Holden, C. W.; and Trzcinka, C. A.. “What Are the Best Liquidity Proxies for Global Research?” Working Paper, Indiana University (2014).Google Scholar
Frazzini, A.“The Disposition Effect and Underreaction to News.” Journal of Finance, 61 (2005), 2017–2046.Google Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.Google Scholar
Gervais, S., and Odean, T.. “Learning To Be Overconfident.” Review of Financial Studies, 14 (2001), 1–27.Google Scholar
Goldstein, M. A.; Irvine, P.; Kandel, E.; and Wiener, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 5175–5212.Google Scholar
Griffin, J. M.; Shu, T.; and Topaloglu, S.. “Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections?” Review of Financial Studies, 25 (2012), 2155–2188.Google Scholar
Hu, G.; McLean, R. D.; Pontiff, J.; and Wang, Q.. “The Year-End Trading Activities of Institutional Investors: Evidence from Daily Trades.” Review of Financial Studies, 27 (2014), 3133–3170.Google Scholar
Hvidkjaer, S.“Small Trades and the Cross-Section of Stock Returns.” Review of Financial Studies, 21 (2008), 1123–1151.Google Scholar
Investment Management Association. Understanding Equity Turnover Data: Initial Findings from IMA Research Submitted to the Kay Review. London, UK: Investment Management Association(2011).Google Scholar
Kosowski, R.; Timmerman, A.; Wermers, R.; and White, H.. “Can Mutual Fund ‘Stars’ Really Pick Stocks? New Evidence from a Bootstrap Analysis.” Journal of Finance, 61 (2006), 2551–2595.CrossRefGoogle Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R.. “The Structure and Performance of the Money Management Industry.” Brookings Papers: Microeconomics, (1992), 339–391.Google Scholar
Lewellen, J.“Institutional Investors and the Limits of Arbitrage.” Journal of Financial Economics, 102 (2011), 62–80.Google Scholar
Ma, L.; Tang, Y.; and Gomez, J.. “Portfolio Manager Compensation and Mutual Fund Performance.” Working Paper, Northeastern University (2015).Google Scholar
Moore, D. A., and Healy, J.. “The Trouble with Overconfidence.” Psychological Review, 115 (2008), 502–517.Google Scholar
Nofsinger, J., and Varma, A.. “Availability, Recency and Sophistication in the Repurchasing Behavior of Retail Investors.” Journal of Banking and Finance, 37 (2013), 2572–2585.CrossRefGoogle Scholar
Puckett, A., and Yan, X.. “The Interim Trading Skills of Institutional Investors.” Journal of Finance, 66 (2011), 601–633.Google Scholar
Shefrin, H.“Behavioral Finance: Biases, Mean-Variance Returns, and Risk Premiums.” CFA Institute Conference Proceedings Quarterly, 31 (2007), 4–12.Google Scholar
Shefrin, H., and Statman, M.. “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence.” Journal of Finance, 40 (1985), 777–791.Google Scholar
Tversky, A., and Kahneman, D.. “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology, 5 (1973), 207–232.Google Scholar
U.S. Department of Labor. “Cross-Trades of Securities by Investment Managers.” Federal Register Notice, 63(1998), 13696–13701.Google Scholar
Wang, Z. J., and Nanda, V.. “Payout Policies and Closed-End Fund Discounts: Signaling, Agency Costs, and the Role of Institutional Investors.” Journal of Financial Intermediation, 20 (2011), 589–619.Google Scholar
Supplementary material: File

Chakrabarty supplementary material

Chakrabarty supplementary material 1

Download Chakrabarty supplementary material(File)
File 104.1 KB