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On the Other Side of Hedge Fund Equity Trades

Research output: Contribution to Journal/MagazineJournal articlepeer-review

E-pub ahead of print
<mark>Journal publication date</mark>31/07/2023
<mark>Journal</mark>Management Science
Number of pages27
Publication StatusE-pub ahead of print
Early online date31/07/23
<mark>Original language</mark>English


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 quasiindexers 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 non-institutions does not result in abnormal performance for hedge funds.