The Trading Dynamics of Institutional Investors

For the exclusive use of Y. Chen INS370 JPMorgan & the London Whale Photo: ALAMY 03/2014-6003 This case was written by Andrew Chen, INSEAD MBA July 2013, under the supervision of Claudia Zeisberger, Affiliate Professor of Decision Sciences & Entrepreneurship and Academic Director of the Global Private Equity Initiative (GPEI) at INSEAD. It is intended to be used

Introduction Warren E. Buffett, the chairperson of Berkshire Hathaway (BH), is the world’s greatest investor of the current era. From 1965 to 2007, BH has compounded annual gain of 20.3% while S&P has 9.3% (Berkshire Hathaway Inc., 2009). Most investors get normal returns and believe the market is in semi strong

Efficient market hypothesis and Behavioral finance Fall 2011 Teacher: Guðrún Johnsen V-780-BFIM Student: Rúnar Guðnason SSN:1804784939 Table of Contents Introduction ................................................................................................................................ 3 1.1 Efficient market hypothesis .................................................................................................. 3 1.2 A criticism on the efficient market hypothesis ................................................................. 4 2.1 Behavioral finance and the efficient market hypothesis ...................................................... 5 2.2 Prospect theory and Loss aversion

In the recent past, the trend in the flow of foreign investors in the United States has been overwhelming. Notably, the numbers of foreign holdings have indicated a consistent desire to purchase stocks and bonds. For instance, external investors own at least 20% of the stocks and 43% of the bonds in the United States stock market. In 2015, the American stock market reached a peak in its investors trust and confidence. The U.S. economy has gained credibility and admiration across the world. It has remained competitive and

It is believed that it will be very difficult for many investors to come to terms, and that returns will be quite modest into the foreseeable future in stocks. Why? Because according to the Wall Street Journal, more than half of all stock investors began investing during the 1990s, a time of unprecedented stock market strength. From 1995 through 1999, the Dow industrials averaged a gain of 24.7% a year and the NASDAQ composite averaged a 41.9% annual gain. Most investors have wrongly come to view such enormous gains as normal. The indexes have never before been able to sustain gains like that and, we doubt, they ever will in most of our lifetimes. Many would argue that recent dramatic downfalls in markets are due to events of 9/11.

Capital Ideas: The Improbable Origins of Modern Wall Street In his book, Capital Ideas: The Improbable Origins of Modern Wall Street, Peter L. Bernstein examines the innovative financial work of various academics that helped shape modern Wall Street. Bernstein sets out to show that Wall Street is in fact a fundamental

In 2000, Fung and Hsieh used a mean-variance approach to study hedge fund exposures in some major market events. They analysed hedge fund performance during turbulent market times. But due to limitations of their research methodology, they

John Westby-Gibson FIRE 461 – spring 2015 Assignment: Bill Miller and Value Trust Case Brief Conventional academic theories suggest that in markets characterized by high competition, easy entry, and information efficiency, it would be extremely difficult to beat the market on a sustained basis. William H. (Bill) Miller III, a mutual fund manager

Since Fama-French Three Factor Model seem to explain average returns on stocks and bonds of North American publicly traded companies (Fama et al., 1993). But no test has been performed on the firm-level returns. Therefore, we present the following hypotheses formally here: H1a: If Fama-French Three Factor Model can capture

Chapter 2 Hedge funds 2.1 Introduction This chapter gives a brief introduction to hedge funds and hedge fund data. Hedge funds are generally considered as private investment vehicles for wealthy individual and institutional investors. According to the National Securities Markets Improvement Act of 1996, participators are limited to at most 500 ‘qualified investors’, individuals who have at least $5 Million to invest in hedge funds and institutional investors with capital of at least $25 Million (Brown and Goetzmann, 2001). Normally, hedge funds are organized as limited partnerships, in which individual and institutional investors are limited partners and the hedge fund managers are general partners (Fung and Hsieh, 1999). To ensure the common economic benefit for investors and managers, hedge fund managers usually take a portion of their own wealth to invest in the funds. The fees charged by the investors consist of the fixed management fee and performance-based fee. The performance-based fee, which is significantly higher than fixed management fee, is paid to successful hedge fund managers. Although hedge funds influence the market dramatically, little about what they really do is understood publicly. Brown and Goetzmann (2001) state that the term ‘hedge fund’ seems to imply market neutral and low risk trading strategies, whereas hedge funds appear to have a high level of risk because of the extensive use of leverage.

The efficient markets hypothesis posits that “security prices fully reflect all available information (Fama, 1991).” In an efficient market, a stock’s price accurately depicts its fundamental value. However, researchers have shown that real markets are actually inefficient, and are hindered by risky arbitrage and irrational investors. Because of market frictions, incomplete information, and systematic biases, stock prices react to changes in uninformed demand in addition to actual fundamental shifts, resulting in sustained and pervasive mispricing. This essay aims to challenge the theory of market efficiency, and in so doing, support the position that stock prices do not always reflect stocks’ fundamental values.

Impact on Non HFT institutional investors There is a severe variation of capital at risk of high frequency trading when compared to capita at risk for institutional investors as noted by KF&Y. Capital at risk is the total amount of capital that an organization deploys in all of its market positions at any specific point of time, as defined by IRRC institute. A high frequency trader generally keeps its capital at risk negligible. Although, HFT companies contributes for nearly 65% by volume in equities, their capital risk is small. On the other hand, the institutional investors or non- high frequency traders amount to a larger market ownership, more than 64% at the end of 2009. The hypothesis is that a small percentage of minority ownership

Questions For many, the markets are a place that creates confusion and uncertainty. This is because these changes will have an adverse impact on their interpretations of different events. The results are that the indices will become increasingly volatile. These factors mean that the emotions of fear and greed will drive these movements. To fully understand these elements requires focusing on the causative variables, the relationship between the different indicators, interpreting the coefficients / providing an analysis of the correlation coefficient values and a summary of what was discovered. Together, these elements will highlight the way these transformations are occurring and the long term impacts they will have on investors' perceptions of underlying events. (Weinstein, 1988) (Graham, 1976)

Challenge 3: Share price reaction in the stock market to IPO under-pricing Nowadays, the prestige of the New York Stock Exchange (NYSE) is clearly attracting a large number of Chinese companies. Commonly, firms such as Alibaba seek to launch initial public offers (IPO) in foreign markets raising the capital that the firm needs to expand its businesses across the globe. Nevertheless, to deal with stock market reactions after an strong debut represents a great challenge for large corporations. Spinal (2014) states that “buying the shares of fundamentally strong companies soon after they hit the public market is fraught with the risk of short-term losses for retail investors”. Certainly, IPO initial returns are profitable, but it is important to consider the dramatically fluctuation that it may face due to volatility and high information asymmetry.

2. Herding in European and U.K. markets a. Herding in Europe Feng and Seasholes (2004) wrote a paper concerning the geographical delimitations of herding behaviour. They found that there is a significant correlation of trading behaviour made by investors on stock markets and that this correlation increases exponentially when investors are selling and buying