Anticipatory Trading Against Distressed Mega Hedge Funds
2021
We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. In anticipation of a 1% drop in stock ownership by distressed MHFs next quarter, other institutions reduce their stock ownership of the same stocks by 1.79% in the current quarter. A one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutional investors front-run the distressed trades of MHFs and destabilize stock prices.
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