As hedge funds and sell-siders tango, regular investors foot the bill: James Saft

 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