Friday, November 06, 2009

SSRN-Do Hedge Fund Managers Identify and Share Profitable Ideas? by Wesley Gray

To share or not to share that is the question. Shakespeare it is not), but when and if to share ideas is an important question.

How so? Suppose you have a great idea. It is an idea that you think could make you much money. You are not sure however. On one hand it could be a bad idea. But to gauge how good of idea (or to brag about it?), you have to tell others. But if you tell others, someone may take your idea.

So what do you do? Interesting question to say the least.

Wesley Gray examined this with respect to hedge fund trading. Now I must confess I am not entirely convinced of the metrics but a very interesting finding none-the-less.

SSRN-Do Hedge Fund Managers Identify and Share Profitable Ideas? by Wesley Gray:
".... Interestingly, these skilled investors share their profitable ideas with their competition. I test various private information exchange theories in the context of my data and determine the investors in my sample share ideas to receive constructive feedback, gain access to a broader set of profitable ideas, and to attract additional arbitragers to their asset market."


tom brakke said...

"Talking your portfolio" is standard practice. If you already have established a holding, it makes sense to try to get others to recognize the wisdom of your idea, so that accounts for much of the sharing instinct. From my cursory look, it didn't appear that the author dealt with the critical question of when the sharing takes place in relation to the sharer's establishment of a full position.

The sharing of ideas throughout the business is common. In some cases, it is a banter between knowledgeable parties about potentially important ideas. There are some people who are very good at reading these interactions and figuring out who is making what kinds of moves, but it isn't of much use unless the firm taking the actions is a major market player.

Otherwise, it is essentially marketing: The communication of fully-formed and, yes, in the funds of the marketer, already fully-invested ideas.

financial directory said...

hedge funds have been a bain on the finance industry in my opinion for years.

market folly said...

Very true, sharing is commonplace. I think the point of 'when' to share is very prudent... whilst still assembling a position? After a full position is on?

We track hedge fund portfolios on and specifically pay attention to the 'Tiger Cub' funds, managers who have since formed their own hf after leaving legendary Tiger Management. The network of managers Julian Robertson has spawned is truly amazing. When comparing their portfolios, you will ultimately see many common positions. While it could be argued that they simply have the same investment methodology, it is very evident that they still all talk. I'll have to write a post on this, but the correlations (at least in their longs) is pretty high.