Harvard Business School PhD candidate Patrick Luo analyzed 341 stocks pitches by 29 hedge funds over five years.
His paper, published in May, shows how those stocks outperformed the market before managers pitched them.
After the pitch, the stocks’ growth tended to slow drastically as the funds sold off their stakes.
Hedge funds love to pitch stocks to investors.
But new research published this spring by Harvard Business School researchers has found that most of them tend to exit their positions right after pitching them to fellow investors at conferences
“Hedge funds take advantage of the publicity of these conferences to strategically release their book information to drive market demand,” Patrick Luo writes in his paper, which was first reported by Bloomberg. “Specifically, hedge funds sell pitched stocks after the conferences to take profit and create room for better investment opportunities.”
In “Talking Your Book: Evidence from Stock Pitches at Investment,” published in May, the recent PhD graduate who now works as a research analyst for the hedge fund AQR Capital Management, looked at 341 stock pitches from 29 hedge fund conference held five years between 2008 and 2013.
He found that stocks pitched by hedge funds tend to gain an impressive 20% return in the 18 months before the pitch. Afterward, that growth slows dramatically, though Luo notes stocks tend to still outperform the benchmark by about 7%
“Pitched stocks exhibit positive risk-adjusted returns both before and after the pitches,” writes Luo. “However, the majority of the outperformance occurs before the pitches.
“Outperformance after the pitches, moreover, is likely driven by inflows from other investors that follow these investment conferences. In spite of outperformance after the pitches, I find that hedge funds do not hold on their pitched stocks any longer than to non-pitched stocks. They instead start to decrease the portfolio weight …read more
Source:: Business Insider