| I analyze why and under what circumstances arbitrageurs will rationally share private information. My model suggests that arbitrageurs will share ideas to gain access to new ideas, lower their portfolio volatility ("diversification sharing"), and to attract additional capital into their asset market ("awareness sharing"). The model suggests that arbitrageurs who have limited ideas, face capital constraints, trade in markets with high noise trader influence, and have investors with a high propensity to withdraw funds following poor performance are more likely to share their private information.;To investigate the claims from my model, I study data from a confidential website where a select group of fundamentals-based hedge fund managers privately share investment ideas. The investors I analyze are not easily defined: they exploit traditional tangible asset valuation discrepancies, such as buying high book-to-market stocks, but spend more time analyzing intrinsic value and special situation investments. Evidence suggests the professional investors in my sample have significant stock-picking skills. Interestingly, these skilled investors share their profitable ideas with their competition. I test various private information exchange theories in the context of my data and determine that the investors in my sample share ideas to receive constructive feedback, gain access to a broader set of profitable ideas, and attract additional arbitragers to their asset market. |
