SAFT ON WEALTH
As hedge funds and sell-siders
tango, regular investors foot the
bill
In the financial market race for information,
hedge funds, it seems, are
the winners.
This of course raises the salient issue
of who the losers are, but you
probably already know the answer to
that.
Hedge funds, company stock analysts
and shareholders form an ecosystem
in which the hedge fund is
the apex predator and the sell-side
analyst is just the enabler. The average
shareholder is the poor sap who
makes the whole exercise profitable
for the other two.
That’s the implication of a newly revised
study by the Federal Reserve
which investigates the way in which
information flows in financial markets:
who gets it first and who trades
on it when. Read Full Article Here
TRADING AGAINST ADVICE
Unlike all the other types of investors
in the study, hedge funds actually
trade in the opposite direction to the
advice of sell-side analysts, selling in
aggregate in upgrades and buying
on downgrades.
“I find that hedge funds are unique:
they trade in the opposite direction
as the sell-side reports recommend,”
Swem writes.
“For example, after sell-side analysts
publish upgrade reports I find that
hedge funds sell.
These patterns
suggest that hedge funds anticipate
sell-side reports, and then reverse
their trades after market prices have
adjusted to the information contained
in, or coinciding with, the analyst
reports.”
What’s more, the more heavily a
company is covered by analysts the
better the risk-adjusted returns
hedge funds generate on these
trades.
When analysts issue reports, the
stocks at issue have an abnormal
return of 3 to 4 percent up or down,
depending on whether the report
contains positive or negative news.
Sometimes the sell-side analyst reports
themselves contain new information
but often they are issued just
after a piece of news about a company
breaks.
http://www.reuters.com/article/us-markets-saft-idUSKBN1772QW