We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. Stocks that are anticipated to be sold by distressed MHFs next quarter experience greater selling by other institutions and elevated short interest in the current quarter. We also find that a one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutions trade ahead of the distressed trades of MHFs and destabilize stock prices.
Agarwal, Vikas and Aragon, George O. and Nanda, Vikram K. and Wei, Kelsey D., Anticipatory Trading Against Distressed Mega Hedge Funds (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=3899627 or http://dx.doi.org/10.2139/ssrn.3899627