Samiksha Jaiswal (Editor)

Insider investment strategy

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The insider investment strategy is an investment strategy that follows the buying and selling decisions of insiders. The primary insiders have information advantage and the proven theory is that they as a group over time will do better than the average investor on the Stock Exchange. However in the world there are only a few investment funds that follow the insider trades, both of them were established in 2011. In America Catalyst Capital Advisors LLC manages Catalyst Insider Buying Fund. This fund is a large-cap, long-only equity fund that only invests in companies where corporate insiders are buying their own company’s stock on the open market. In Europe Dovre Forvaltning UAB manages Dovre Inside Nordic fund. This fund is a Nordic equity fund, which strategy is to follow the primary insiders in listed companies and/or shareholders with assumed close relationship to company, board and management.

Insider trading studies

A Lorie-Niederhoffer study indicates that proper and prompt analysis of data on insider trading can be profitable.

Glass examines 14 different calendar months and selects the eight securities with the greatest excess of buyers to sellers among insiders within a month. He finds that the average return on these securities is 10 percent above the return on the stock market as a whole in the 7 months following the individual months of intensive buying.

In 2014 Dovre Forvaltning shared there analysis on insiders influence in the Nordic region. The company analyzed these different yearly portfolios (both for Purchases and Sales):

  • Had an insider Purchases in the past 1/3/6 months.
  • Had only insider Purchases in the past 1/3/6 months.
  • Last insider transaction in the past 1/3/6 months was an insider Purchase.
  • Had an insider Sales in the past 1/3/6 months.
  • Had only insider Sales in the past 1/3/6 months.
  • Last insider transaction in the past 1/3/6 months was an insider Sale.
  • Only transactions above 80.000 SEK were included (33% of all insider trades were excluded because they were too small). If there were no Purchases/Sales in 1,3,6 months after a company’s inclusion, it was excluded from the portfolio. All stocks are equally weighted. The analysis showed that:

  • Highest outperformance is in Small Caps insider Purchase portfolios. Smaller in Mid Caps Purchase portfolios. And smallest in Large Caps insider Purchase portfolios.
  • ‘Insider effect’ fades away with longer holding horizon.
  • Sell signals are stronger than Buy signals.
  • Sell signals are the strongest when more than 50% of holdings are sold.
  • Buy signals are the strongest when signal transaction value is <80.000 SEK.
  • References

    Insider investment strategy Wikipedia