Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns

Abstract

We find strong disagreements between hedge funds and other institutions in their common stock trades are twice as likely as agreements. Overall success of hedge funds’ trades and poor performance of non‐hedge funds’ trades are both confined to disagreement stocks. Although hedge funds are commonly positive feedback traders, they are neither positive nor negative feedback traders for stocks heavily sold by other institutions. Hedge funds also depend less on earnings news. Our findings highlight the importance of disagreement in studying the performance of institutional investors’ trades and are consistent with the notion that skilled investors rely less on public information.

What Makes Fund Managers Leave Their Jobs Faster?

“…A similar argument can also be drawn from the strand of literature concerning the value-adding market-timing and stock-picking capabilities of fund managers (Alda, 2018;Baker et al, 2010;Bangassa, Su and Joseph, 2012;Feng and Johanson, 2015;Hentati-Kaffel and de Peretti, 2015;Osinga, Schauten and Zwinkels, 2021), although Kosowski et al (2006) and Yi and He (2016) are sceptical as to whether Chinese fund managers have indeed such capabilities. Likewise, Caglayan, Celiker and Sonaer (2022) document twice as many disagreements than agreements between hedge funds and other institutions in their common stock trades, suggesting differences in fund managers' skills and their responsiveness to public information; and Kacperczyk and Seru (2007) find that the responsiveness of a fund manager's portfolio allocations to changes in public information are negatively related to the manager's skill. Therefore, fund manager changes are likely to entail substantial changes in the features of the fund.…”

“…(2006) and Yi and He (2016) are sceptical as to whether Chinese fund managers have indeed such capabilities. Likewise, Caglayan, Celiker and Sonaer (2022) document twice as many disagreements than agreements between hedge funds and other institutions in their common stock trades, suggesting differences in fund managers’ skills and their responsiveness to public information; and Kacperczyk and Seru (2007) find that the responsiveness of a fund manager's portfolio allocations to changes in public information are negatively related to the manager's skill. Therefore, fund manager changes are likely to entail substantial changes in the features of the fund.…”