The Information in Industry-Neutral Self-Financed Trades

We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) by long only fund managers who possess a positive short-lived private signal and self finance informed stock purchases by selling an equivalent dollar amount of stock in the same industry. Despite constituting a small fraction of their trading activity, 37% of fund trading profits are attributable to INSFIT over a ten-day horizon. INSFIT also precedes the release of public earnings information and corporate disclosures. The prevalence of relative valuation as well as the need to hedge industry exposure motivate INSFIT’s industry neutrality. Furthermore, INSFIT occurs more frequently among cash-constrained managers but is uncorrelated across fund managers. Although INSFIT involves relatively large dollar-denominated trades, transaction costs cannot account for its profitability.