Skip to main content Accessibility help
×
Home

The Performance of Short-Term Institutional Trades

  • Bidisha Chakrabarty, Pamela C. Moulton and Charles Trzcinka

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.

Copyright

Corresponding author

* Chakrabarty, chakrab@slu.edu, Cook School of Business, Saint Louis University; Moulton (corresponding author), pmoulton@cornell.edu, SC Johnson College of Business, Cornell University; and Trzcinka, ctrzcink@indiana.edu, Kelley School of Business, Indiana University, Bloomington.

Footnotes

Hide All
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.

Footnotes

References

Hide All
Amihud, Y.Illiquidity and Stock Returns: Cross Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 3156.
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), 773797.
Asness, C. S.; Moskowitz, T. J.; and Pedersen, L. H.. “Value and Momentum Everywhere.” Journal of Finance, 68 (2013), 929985.
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), 24852532.
Berk, J. B., and van Binsbergen, J. H.. “Measuring Skill in the Mutual Fund Industry.” Journal of Financial Economics, 118 (2015), 120.
Boehmer, E., and Kelley, E.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 35633594.
Bushee, B. J.Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?Contemporary Accounting Research, 18 (2001), 207246.
Bushee, B. J., and Noe, C. F.. “Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility.” Journal of Accounting Research, 38 (2000), 171202.
Busse, J.; Goyal, A.; and Wahal, S.. “Performance and Persistence in Institutional Investment Management.” Journal of Finance, 65 (2010), 765790.
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 16071648.
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).
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Recent Trends in Trading Activity and Market Quality.” Journal of Financial Economics, 101 (2011), 243263.
Chung, K. H., and Zhang, H.. “Corporate Governance and Institutional Ownership.” Journal of Financial and Quantitative Analysis, 46 (2011), 247273.
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 20452073.
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), 288306.
Cremers, M.; Pareek, A.; and Sautner, Z.. “Stock Duration, Analyst Recommendations, and Misevaluation.” Working Paper, University of Notre Dame (2014).
Daniel, K.; Grinblatt, M.; Titman, S.; and Wermers, R.. “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks.” Journal of Finance, 52 (1997), 10351058.
Dow, J., and Gorton, G.. “Noise Trading, Delegated Portfolio Management, and Economic Welfare.” Journal of Political Economy, 105 (1997), 10241050.
Fama, E., and French, K.. “Luck versus Skill in the Cross Section of Mutual Fund 𝛼 Estimates.” Journal of Finance, 65 (2010), 19151947.
Ferreira, M., and Matos, P.. “The Colors of Investors’ Money: The Role of Institutional Investors around the World.” Journal of Financial Economics, 88 (2008), 499533.
Fong, K.; Holden, C. W.; and Trzcinka, C. A.. “What Are the Best Liquidity Proxies for Global Research?” Working Paper, Indiana University (2014).
Frazzini, A.The Disposition Effect and Underreaction to News.” Journal of Finance, 61 (2005), 20172046.
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135165.
Gervais, S., and Odean, T.. “Learning To Be Overconfident.” Review of Financial Studies, 14 (2001), 127.
Goldstein, M. A.; Irvine, P.; Kandel, E.; and Wiener, Z.. “Brokerage Commissions and Institutional Trading Patterns.” Review of Financial Studies, 22 (2009), 51755212.
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), 21552188.
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), 31333170.
Hvidkjaer, S.Small Trades and the Cross-Section of Stock Returns.” Review of Financial Studies, 21 (2008), 11231151.
Investment Management Association. Understanding Equity Turnover Data: Initial Findings from IMA Research Submitted to the Kay Review. London, UK: Investment Management Association(2011).
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), 25512595.
Lakonishok, J.; Shleifer, A.; and Vishny, R.. “The Structure and Performance of the Money Management Industry.” Brookings Papers: Microeconomics, (1992), 339391.
Lewellen, J.Institutional Investors and the Limits of Arbitrage.” Journal of Financial Economics, 102 (2011), 6280.
Ma, L.; Tang, Y.; and Gomez, J.. “Portfolio Manager Compensation and Mutual Fund Performance.” Working Paper, Northeastern University (2015).
Moore, D. A., and Healy, J.. “The Trouble with Overconfidence.” Psychological Review, 115 (2008), 502517.
Nofsinger, J., and Varma, A.. “Availability, Recency and Sophistication in the Repurchasing Behavior of Retail Investors.” Journal of Banking and Finance, 37 (2013), 25722585.
Puckett, A., and Yan, X.. “The Interim Trading Skills of Institutional Investors.” Journal of Finance, 66 (2011), 601633.
Shefrin, H.Behavioral Finance: Biases, Mean-Variance Returns, and Risk Premiums.” CFA Institute Conference Proceedings Quarterly, 31 (2007), 412.
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), 777791.
Tversky, A., and Kahneman, D.. “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology, 5 (1973), 207232.
U.S. Department of Labor. “Cross-Trades of Securities by Investment Managers.” Federal Register Notice, 63(1998), 1369613701.
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), 589619.
Type Description Title
UNKNOWN
Supplementary materials

Chakrabarty supplementary material
Chakrabarty supplementary material 1

 Unknown (104 KB)
104 KB

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed