stocks are covered by more than thirteen sell-side analysts (
compared to the sample mean of about eight for all CRSP stocks).
At the end of each quarter, we classify cloaked trades in the following way: If a mutual fund sells a stock in the five days before and
buys the same stock in the five days after the quarter end, we classify it as a buy cloaked trade, and vice versa for a sell cloaked trade.
Moreover, we require the amount of buying/selling in the five days
after to be greater than 0.5 of the amount of selling/buying in the
five days before the quarter end. In an average quarter, we are able
to identify sixty-four such cloaked trades. The average cloaked
trade is about 0.2 million shares, worth close to $8.4 million.
Results: Cloaked Trading
In this section we examine mutual fund managers’ portfolio
choices. In particular, we document strategic trading behavior we
term “cloaked trading.” Cloaked trading is trading specifically to
avoid detection of positions from public disclosure. This trading is
motivated by the Securities Exchange Act of 1934 Section 13(f)
mandated requirement of public disclosure of the holdings of institutions that have eligible assets greater than $100 million. This
mandated public disclosure serves as a portfolio constraint around
which managers must maximize.
We define cloaked trades as trades made for the specific goal of
subverting this reporting; for example, a manager who sells an
entire position of Microsoft on March 30 and then repurchases to
re-establish the same position on April 1. This manager will be
holding an almost economically identical position were she to have
held over all three days with the important distinction that were
she to have held over all three days, she would have had to publicly
signal this position. More generally, if a mutual fund sells an entire
position in a stock in the five days before the mandatory report
date and buys the stock in the five days after the quarter end, we
classify it as a buying cloaked trade (long) and vice versa for a selling cloaked trade (short).
We then begin by forming simple portfolios in which we long the
cloaked buys and short the cloaked sells each quarter and examine
the future returns to this cloaked trading. We begin portfolio formation on the sixth trading day following quarter end (report
date)—following the five days of trading post quarter-end—such
that all returns are predictive. From table 2A, we see the large and
statistically significant excess returns that accrue to these cloaked
trades. For instance, the excess returns to the simple portfolio that
longs cloaked buys and shorts cloaked sells yields 370 basis points
in the month following formation (t = 3. 12), an annualized return
of more than 36 percent per year.
Table 1: Summary Statistics
Deviation Minimum Q1 Median Q3 Maximum
(A): ANcerno Data (quarterly observations)
Number of mutual funds per quarter 67 27 21 53 59 66 155
Number of institutional accounts per quarter 714 378 272 290 747 986 1,435
Average trading (#MM) by a mutual fund 21. 2 8. 7 9. 8 14. 7 18. 9 26. 7 47. 6
Average trading ($MM) by a mutual fund 741.6 328.5 343.5 463.7 662.0 894.1 1,949.6
Average trading (#MM) by an institutional account 13. 2 6. 3 3. 1 9. 6 12. 3 16. 2 27. 5
Average trading ($MM) by an institutional account 442.7 214.2 84.5 300.5 413.1 564.3 958.5
(B): Stocks Held by Mutual Funds (pooled across all quarters)
Market capitalization ($MM) 7. 22 22.93 0.00 0.58 1. 53 4. 74 602.43
Book-to-marketratio 0.49 0.50 0.02 0.20 0.35 0.61 11. 18
Institutionalownership 0.68 0.20 0.00 0.57 0.72 0.83 1.00
Analystcoverage 13. 21 7.83 1.00 7.00 12.00 18.00 51.00
(C): Cloaked Trades by Mutual Funds (quarterly observations)
Number of cloaked trades per quarter 64 36 7 35 63 94 134
Average size (#MM) of a cloaked trade 0.2 0.2 0.0 0.1 0.1 0.3 0.8
Average size ($MM) of a cloaked trade 8. 4 6. 5 1. 7 3. 8 5. 8 10. 5 31. 4
Table 1 reports summary statistics of our sample, which spans the period 1999–2011. (A) reports some basic statistics of the ANcerno dataset: the number of mutual funds and
institutional accounts each quarter, and their average trading volume (in million shares and million dollars) each quarter. Mutual funds are those accounts in ANcerno that we match
to the CRSP mutual fund database using either the fund name or manager name, and institutional accounts are the ones that we cannot match to the CRSP mutual fund database.
(B) reports basic statistics of stocks held by mutual funds in the ANcerno sample. Institutional ownership is the fraction of shares outstanding held by all institutional investors, and
analyst coverage is the number of analysts covering the firm in question. (C) reports basic statistics of cloaked trades by mutual funds, which are defined in the following way:
If a mutual fund sells a stock in the five days before and buys the stock in the five days after the quarter end, we classify it as a buy cloaked trade, and vice versa for a sell cloaked
trade. Moreover, we require the amount of buying/selling in the five days after to be greater than 0.5 of the amount of selling/buying in the five days before the quarter end. In the
table, millions of shares is denoted (#MM) and millions of dollars is denoted ($MM).