Disagreement between hedge funds and other institutional investors and the cross-section of expected stock returns

Abstract

We find strong disagreements between hedge funds and other institutions in their common stock trades are twice as likely as agreements. Overall success of hedge funds’ trades and poor performance of non-hedge funds’ trades are both confined to disagreement stocks. Although hedge funds are commonly positive feedback traders, they are neither positive nor negative feedback traders for stocks heavily sold by other institutions. Hedge funds also depend less on earnings news. Our findings highlight the importance of disagreement in studying the performance of institutional investors’ trades and are consistent with the notion that skilled investors rely less on public information.