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Insider investment strategy

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The insider investment strategy is an investment strategy that follows the buying and selling decisions of so-called "insiders" in a stock market. The primary insiders have an advantage because they have access to more information about issues that could affect the current and future value of stock, which is known as an "information advantage." However, in the world there are only a few investment funds that follow the insider trades, both of them were established in 2011.

In the United States, Catalyst Capital Advisors LLC [1] manages [2] Catalyst Insider Buying Fund. This fund is a large-cap, long-only equity fund that only invests in companies where corporate insiders are buying their own company's stock on the open market. In Europe, Dovre Forvaltning UAB [3] manages Dovre Inside Nordic fund.[4]

Effectiveness

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A Lorie-Niederhoffer study indicates that proper and prompt analysis of data on insider trading can be profitable.

In 2014, Dovre Forvaltning shared his analysis on Insider Influence in the Nordic Region.[5] The company analyzed these different yearly portfolios (both for Purchases and Sales):[6]

  • Had an insider Purchases in the past 1/3/6 months.
  • Had only insider Purchases in the past 1/3/6 months.
  • Last insider Transaction in the past 1/3/6 months was an insider Purchase.
  • Had an insider Sales in the past 1/3/6 months.
  • Had only insider Sales in the past 1/3/6 months.
  • Last insider Transaction in the past 1/3/6 months was an insider Sale.

Only transactions above 80.000 SEK were included (33% of all insider trades were excluded because they were too small). If there were no Purchases/Sales in 1,3,6 months after a company's inclusion, it was excluded from the portfolio. All stocks are equally weighted. The analysis [7] showed that:

  • Highest out performance was in Small Caps insider Purchase portfolios. Smaller in Mid Caps Purchase portfolios. And smallest in Large Caps insider Purchase portfolios.
  • 'Insider effect' fades away with longer holding horizon.
  • Sell signals are stronger than Buy signals.
  • Sell signals are the strongest when more than 50% of holdings are sold.
  • Buy signals are the strongest when signal transaction value is <80.000 SEK.

Studies of insider trading

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Year Author Article/Research
1966 Garry A. Glass Extensive Insider Accumulation as an Indicator of Near-Term Stock Price Performance [8]
1968 James H. Lorie, Victor Niederhoffer Predictive and Statistical Properties of Insider Trading [9]
1974 Jeffrey F. Jaffe Special Information and Insider Trading [10]
1976 Joseph E. Finnerty Insiders and Market Efficiency [11]
1979 Jerome B. Baesel, Garry R. Stein The Value of Information: Inferences from the Profitability of Insider Trading [12]
1985 Dan Givoly, Dan Palmon Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence [13]
1997 Alan Gregory, John Matatko and Ian Tonks Detecting Information From Directors Trades: Signal definition and variable size effects [14]
2001 Josef Lakonishok and Inmoo Lee Are Insider Trades Informative?[15]
2002 Sylvian Friederich, Alan Gregory, John Matatko, Ian Tonks Short-run Returns around the Trades of Corporate Insiders on the London Stock Exchange [16]
2003 Mathijs A. Biesta, Ronald Q. Doeswijk, Han A. Donker The Profitability of Insider Trades in the Dutch Stock Market [17]
2006 Emanuele Bajo, Barbara Petracci Do what insiders do: Abnormal performances after the release of insiders' relevant transactions[18]

References

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  1. ^ "America Catalyst Capital Advisors". America Catalyst Capital Advisors.
  2. ^ "America Catalyst Capital Advisors" (PDF). America Catalyst Capital Advisors. Archived from the original (PDF) on 2016-03-04. Retrieved 2014-08-24.
  3. ^ "Dovre Forvaltning". Dovre Forvaltning. 2014-03-21.[permanent dead link]
  4. ^ "Fund Facts: Dovre Inside Nordic". Dovre Forvaltning. Archived from the original on 2014-11-03. Retrieved 2014-08-24.
  5. ^ "Dovre Insider Study" (PDF). Dovre Forvaltning. Archived from the original (PDF) on 2014-11-03. Retrieved 2014-11-03.
  6. ^ "Dovre Insider Study" (PDF). Dovre Forvaltning. Archived from the original (PDF) on 2014-11-03. Retrieved 2014-11-03.
  7. ^ "Dovre Insider Study" (PDF). Dovre Forvaltning. Archived from the original (PDF) on 2014-11-03. Retrieved 2014-11-03.
  8. ^ "Extensive Insider Accumulation as an Indicator of Near-Term Stock Price Performance". Garry A. Glass. Archived from the original on 2016-03-04. Retrieved 2014-08-24.
  9. ^ "Predictive and Statistical Properties of Insider Trading" (PDF). James H. Lorie, Victor Niederhoffer.
  10. ^ Jaffe, Jeffrey F. (1974). "Special Information and Insider Trading". The Journal of Business. 47 (3): 410–428. doi:10.1086/295655. JSTOR 2352458.
  11. ^ "The Value of Information: Inferences from the Profitability of Insider Trading" (PDF). Jerome B. Baesel, Garry R. Stein.
  12. ^ Baesel, Jerome B.; Stein, Garry R. (1979). "The Value of Information: Inferences from the Profitability of Insider Trading". The Journal of Financial and Quantitative Analysis. 14 (3): 553–571. doi:10.2307/2330188. JSTOR 2330188. S2CID 154470151.
  13. ^ Dan Givoly, Dan Palmon (1985). "Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence". The Journal of Business. 58 (1): 69–87. doi:10.1086/296283. JSTOR 2352910.
  14. ^ Alan Gregory, John Matatko and Ian Tonks (1997). "Detecting Information From Directors Trades: Signal definition and variable size effects". Journal of Business Finance & Accounting. 24 (3): 309–342. doi:10.1111/1468-5957.00107.
  15. ^ "Are Insider Trades Informative?" (PDF). Josef Lakonishok and Inmoo Lee. Archived from the original (PDF) on 2012-09-07. Retrieved 2014-08-24.
  16. ^ "The Profitability of Insider Trades in the Dutch Stock Market" (PDF). Sylvian Friederich, Alan Gregory, John Matatko, Ian Tonks.
  17. ^ "The Profitability of Insider Trades in the Dutch Stock Market" (PDF). Mathijs A. Biesta, Ronald Q. Doeswijk, Han A. Donker. September 2003. SSRN 498042.
  18. ^ "Do what insiders do: Abnormal performances after the release of insiders' relevant transactions" (PDF). Emanuele Bajo, Barbara Petracci. Archived from the original (PDF) on 2018-10-17. Retrieved 2014-08-24.
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