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On the Other Side of Hedge Fund Equity Trades

Author

Listed:
  • Xinyu Cui

    (University of Bristol Business School, University of Bristol, Bristol BS8 1QU, United Kingdom)

  • Olga Kolokolova

    (Accounting and Finance Division, Alliance Manchester Business School, University of Manchester, Manchester M13 9SS, United Kingdom)

  • Jiaguo (George) Wang

    (Management School, Lancaster University, Lancaster LA1 4YW, United Kingdom)

Abstract

Hedge funds earn positive ex post abnormal returns and avoid negative abnormal returns on their equity portfolios when trading in the opposite direction of highly diversified low-turnover institutional investors (quasi indexers). This pattern seems to be driven by the preferences of quasi indexers for high-market-beta stocks together with the ability of hedge funds to identify subsets of especially profitable trades. It remains pronounced when accounting for other determinants of hedge fund trades, such as stock liquidity, market anomalies, and major corporate events. Trading against other institutional investors or noninstitutions does not result in abnormal performance for hedge funds.

Suggested Citation

  • Xinyu Cui & Olga Kolokolova & Jiaguo (George) Wang, 2024. "On the Other Side of Hedge Fund Equity Trades," Management Science, INFORMS, vol. 70(6), pages 3684-3710, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3684-3710
    DOI: 10.1287/mnsc.2023.4877
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