In China, a Persistent Edge for Big Insiders: Study

May 2, 2013 Leave a comment

April 30, 2013, 1:30 P.M. ET

In China, a Persistent Edge for Big Insiders: Study

By Ben Levisohn

The U.S. has gone to great lengths to root out insider trading–just ask Martha Stewart, Rajat Gupta or any one of the folks at SAC Capital that have been charged with the crime. In China, however, it might just be how the game is played. In the NBER working paper Informed Trading and Expected Returns, authors James Choi,Li Jin, and Hongjun Yan tracked institutional buying of Chinese stocks. Their finding: Stocks that are bought aggressively by institutions outperform those with the least by a wide margin. NBER summed up the report,which is available here:

The authors first show that stocks bought heavily by institutions subsequently outperform stocks sold heavily by institutions. Thus, institutions appear to have a strong information advantage over individual investors, and that is true for stocks of all sizes. Moreover, the authors confirm that the institutional sector’s future information advantage is larger in stocks that it previously traded more aggressively. Therefore, the aggressiveness of institutional trading in a stock, as measured by prior institutional ownership volatility, can be used as an ex ante predictor of future information asymmetry in this stock.

…the authors find that the 20 percent of stocks with the greatest information asymmetry have future annualized returns that are 10.8 percentage points higher than the 20 percent of stocks with the least information asymmetry.The authors believe the outperformance exists because companies are more likely to share some information with some investors, but not others, the digest says, because “of the state of Chinese legal institutions and regulations.” The iShares FTSE China 25 Index (FXI) has lost 4.8% annually during the past five years,  while the SPDR S&P 500 (SPY) has gained 5% a year during the same period. The MSCI China, which is tracked by the iShares MSCI China Index ETF (MCHI) has lost 1.9%.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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