Cloaked Trading

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Authors of the Article

  • Lauren Cohen, Harvard Business School; National Bureau of Economic Research (NBER)
  • Dong Lou, London School of Economics & Political Science (LSE)
  • Christopher J. Malloy, Harvard Business School; National Bureau of Economic Research (NBER)

Publication Year

2016

Take-aways

  • Fund managers who have to disclose their holdings one a quarterly basis hide some of their positions using window-dressing (ie. Selling right before the quarter-end snapshot, and re-entering in the position afterward).
  • The positions hidden earn abnormal returns: +370bps on the next month (annualized 36%).

Quotes

"Fund managers, knowing that the snapshot of their quarter-end holdings is mandated to be publicly viewable, solve endogenously as to the quantity and scope of information they choose to reveal through the snapshot"
"Mandated portfolio requirements and constraints are not without merit or justification, but we must recognize their onerous nature and the distortion these constraints have on observed behaviour."

References