Insider investment strategy

The insider investment strategy is an investment strategy that follows the buying and selling decisions of so-called "insiders" in a stock market. The primary insiders have an advantage because they have access to more information about issues that could affect the current and future value of stock, which is known as an "information advantage." However, in the world there are only a few investment funds that follow the insider trades, both of them were established in 2011.

In the United States, Catalyst Capital Advisors LLC ^[1] manages ^[2] 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 ^[3] manages Dovre Inside Nordic fund.^[4]

Effectiveness

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

In 2014, Dovre Forvaltning shared his analysis on Insider Influence in the Nordic Region.^[5] The company analyzed these different yearly portfolios (both for Purchases and Sales):^[6]

• 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 ^[7] showed that:

• Highest out performance was 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.

Studies of insider trading

Year	Author	Article/Research
1966	Garry A. Glass	Extensive Insider Accumulation as an Indicator of Near-Term Stock Price Performance [8]
1968	James H. Lorie, Victor Niederhoffer	Predictive and Statistical Properties of Insider Trading [9]
1974	Jeffrey F. Jaffe	Special Information and Insider Trading [10]
1976	Joseph E. Finnerty	Insiders and Market Efficiency [11]
1979	Jerome B. Baesel, Garry R. Stein	The Value of Information: Inferences from the Profitability of Insider Trading [12]
1985	Dan Givoly, Dan Palmon	Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence [13]
1997	Alan Gregory, John Matatko and Ian Tonks	Detecting Information From Directors Trades: Signal definition and variable size effects [14]
2001	Josef Lakonishok and Inmoo Lee	Are Insider Trades Informative?[15]
2002	Sylvian Friederich, Alan Gregory, John Matatko, Ian Tonks	Short-run Returns around the Trades of Corporate Insiders on the London Stock Exchange [16]
2003	Mathijs A. Biesta, Ronald Q. Doeswijk, Han A. Donker	The Profitability of Insider Trades in the Dutch Stock Market [17]
2006	Emanuele Bajo, Barbara Petracci	Do what insiders do: Abnormal performances after the release of insiders' relevant transactions[18]