Exploring the Behavioural Biases of Institutional Investors
Are elite fund managers subject to the same behavioural biases as retail investors? If so which decisions are most affected?
Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors is an academic paper that explores these questions. The paper uses data from the Inalytics Peer Group, comprising 783 institutional portfolios and over 4.4 million trades from 2000 to 2016.
The paper is co-authored by Rick Di Mascio, CEO and Founder of Inalytics alongside three academics, Alex Imas from Carnegie Mellon University, Lawrence Schmidt from MIT Sloan School of Management and Klakow Akepanidtaworn from University of Chicago – Booth School of Business.
The research reveals that whilst investment managers have investment skill in buy decisions, selling decisions on the other hand underperform substantially. In the analysis, poor selling decisions cost managers nearly 100 basis points of alpha annually. In fact, the observed selling is so poor that adopting a random selling strategy would actually be beneficial to performance.
The authors discover that even institutional investors are subject to behavioural biases and would benefit from employing the same rigorous research methods when selling as they do when buying positions.
Download the full academic paper below or contact us to learn more about how we identify investment skill and analyse decision making to help improve the investment process and select skilful portfolio managers.
Evidence from detailed hedge fund portfolio data
Should short positions be considered as negative long positions? How does short selling differ from long investment?
Are shorts just negative longs? is an academic paper co-authored by Sandro Lunghi from Inalytics and Bastian von Beschwitz from the Federal Reserve Board, which explores these questions.
Using the Inalytics Peer Group database, which comprised of 21 long-short hedge funds from 2005 to 2015, the co-authors explore the differences in decision making when trading long and short positions.
The paper finds that long buys and short sells are informed, but that long sells and short buys are uninformed. In fact, it the authors find that it is possible to generate significant alphas by taking the opposite trades to long sells and short buys. This implies that hedge funds close their positions too early and “leave money on the table”. Furthermore, while hedge funds trade on momentum when trading both long and short positions, subsequent orders exhibit a momentum bias for shorts and contrarian bias for longs. We argue this comes from hedge funds’ desire to keep their position sizes stable.
Download the full academic paper below or contact us to learn more about how we analyse portfolios and decision making to help improve the investment process and select skilful portfolio managers.
Rick Di Mascio of Inalytics co-authored an Academic paper with, Anton Lines of Columbia Business School and Narayan Y. Naik of London Business School.
Using a novel sample of professional asset managers, they document positive incremental alpha on newly purchased stocks that decays over twelve months. While managers are successful forecasters at these short-to-medium horizons, their average holding period is substantially longer (2.2 years). Both slow alpha decay and the horizon mismatch can be explained by strategic trading behaviour. Managers accumulate positions gradually and unwind gradually once the alpha has run out; they trade more aggressively when the number of competitors and/or correlation among information signals is high, and do not increase trade size after unexpected capital flows. Alphas are lower when competition/correlation increases.
Download the full academic paper or contact us to learn more about how we analyse portfolios and decision making to improve the investment process and help select skilful portfolio managers.