Article Reviews

Symbiotic Relationship Between Analysts and Hedge Funds

There is a study at the BNP Paribas Hedge Fund Centre at the Singapore Management University with an interesting conclusion. Source: here. Paper: here.

The abstract captures it succinctly:

We find that analysts are more likely to issue favorable recommendations for stocks predominantly owned hedge funds. Moreover, these optimistic recommendations translate into poorer stock performance over the next three to six months. Hedge funds take advantage of these flattering reports by concurrently offloading their stock holdings. Our results suggest that analysts are reluctant to downgrade stocks held by their most important clients

Some interesting detail also about how hedge funds offload to institutional investors who seem to believe the analysts.

We show that when analysts issue optimistic recommendations on stocks held by hedge funds, the funds are more likely to reduce their positions in those stocks during the same quarter. In particular, for any given quarter, when the mean analyst consensus for a stock is equal to or greater than a buy, hedge funds are 11.1 percent more likely to unwind their positions in the same stock. Conversely, under the same circumstances, other institutional investors are 25.2 percent less likely to sell a stock.

These findings suggest that hedge funds, by pressurizing sell-side analysts into issuing overly optimistic recommendations on stocks that they hold, are able to offload their equity positions to other unsuspecting institutional investors.



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