Markets

Insider Trading

Hedge Funds

Retirement

Opinion

Insider Trading Education Center

Academic Studies On Insider Trading

Find the first part of this article here: Insider Trading Anomaly: Make 7 Percent More Than Index Funds

In 1986 University of Michigan professor Nejat Seyhun used a better methodology to measure abnormal returns. He incorporated the “size effect”. In his sample, insiders in small firms had predominantly more purchases than sales. Insider Monkey also observes the same pattern in our dataset: 60% of transactions are made by insiders in small firms, even though in dollar terms this corresponds to only 16% of all transactions. Seyhun found abnormal returns of 4.3% for the first 300 days for firms with more insider purchases than sales, and -2.2% in the same period for firms with more insider sales than purchases. He noted that employing intensive trading criteria yielded similar results.

Studies conducted until around this time were based on random subsets of insider transactions . Remember, they didn’t have comprehensive databases or powerful computers like those that are available now. More recently, studies utilize the entire insider transactions dataset and remove any remaining doubts about the profitability of insider trading.

In 2001, University of Illinois at Urbana Champaigne’s Josef Lakonishok and Inmoo Lee corrected for size and B/M effects by using a different trading criterion. They too concluded that the difference between strong buy and strong sell portfolios, which excluded transactions of large shareholders, is 4.8% for the first year after the transactions. They didn’t find any abnormal returns for large shareholders. (See Insider Trading Returns Calculated by Josef Lakonishok and Inmoo Lee)

Two years later, Harvard University’s Leslie A. Jeng and Richard Zeckhauser and Yale University’s Andrew Metrick calculated insiders’ actual returns for their purchases and sales. They didn’t use any sort of screening criteria such as consensus or “intensive purchases” that are used by other researchers. They also started calculating returns as soon as an insider made a transaction, not when the transaction became public. They found that insider sales are not profitable but insider purchases are extremely so. In raw returns, insider purchases beat the market returns by 11.2% per year.

And this return is not risk adjusted. By comparison, when a mutual fund announces they beat the market by more than 10%, they’re not adjusting for risk either. The risk adjusted excess returns for the Harvard profs’ study are 52 basis points per month (or 6.4% annualized) using Carhart’s four factor model (Risk adjusted returns are 8.5% if you use CAPM to adjust for risk). Achieving 6.4% annualized returns without utilizing a consensus criteria is insane. And unbelievably, they found that purchases in small firms don’t earn significantly higher returns than do purchases in large firms.

It’s been empirically shown that insider trading has beaten the market indexes over the past 50 years. Academic studies have been publicizing this for 40 years. Yet, the markets aren’t efficient enough yet to eliminate these abnormal returns. Insider Monkey, your source for free insider trading data, believes that it’s still possible to beat market indexes and achieve abnormal returns in the long run by utilizing insider trading data.
Markets aren’t as efficient as you think.

Who are we?

Insider Monkey is one of the fastest growing financial research websites on the web, read by 1.5 million people every month.

Our research is headed by Ian Dogan who is a former fund manager, holding a Ph.D. in the field. We partnered with Marketwatch and created the Marketwatch/Insider Monkey Billionaire Hedge Fund Index.

Our content has appeared on:

Testimonials
  • I've been an Insider Monkey subscriber for a couple years now and the flagship strategy is one of the best strategies in my portfolio. Because the strategy is small cap you will see some major short term swings, but if you can follow the strategy and rebalance only once every quarter you will see some really strong results once you hit the 12 month time frame and beyond.
    David L.
  • I initially became aware of Insider Monkey when Meena was interviewed on Business News Network (BNN) in Canada. The idea of mimicking the best ideas from the best fund managers was appealing (as I have met many smart managers on Bay Street in Toronto). While I have only had the newsletter for one year, the Insider Monkey allocation has been the best performer in my equity portfolio. I look forward to continued outperformance in the future.
    G. Chin
    Toronto, Canada
  • I first came across Insider Monkey (IM) nine quarters ago (1/2013) and since then have enjoyed exceptional returns. Last year (3/2014) I traveled to NYC to meet the founder because I was thinking about doubling down on their strategy. I left favourably impressed and proceeded. It was a smart move. At the beginning of this year I decided to double down again. There are no guarantees but preliminary results are promising.

    Why do I recommend IM?
    1. It's easy: 15 picks every 90 days. Most picks are repeated at least once, some more than eight times.
    2. It's flexible: if a pick goes bad you only hold it for 90 days.
    3. Time saving: the IM team vets hundreds of HF SEC reports every 90 days and produces a list of 15 SC picks from the best stock pickers in the world. A world-class research department for less than a dollar a day.
    4. It works. Need I say more?

    One admonishment: have faith in the model, hold all 15 picks for ninety days.
    Tommy
  • I want to thank you and the team for the great results this past year. Many of my friends and colleagues use profesional financial advisors and annually pay 1% to 1.5% of their portfolio value for mediocre results. Insider Monkey's performance is outstanding for a mere fraction of the cost. I am an analyst for a utility and have always wanted to invest in high growth small cap stocks, but I have never had the time, expertise or access to the information needed to effectively research them, and was never comfortable with casual stock recommendations from magazines, blogs, and television. I had never subscribed to a premium publication but was immediately impressed with the Insider Monkey team’s analysis and the proven results of the 15 Stock Small Cap Strategy.

    Keep up the great work. Thus far, the Insider Monkey team’s approach has enhanced my investment portfolio and I look forward to future issues and following the team’s investment strategy throughout the foreseeable future.
    Jim T.
    New York