Cloaked Trading

Using a novel, proprietary database of micro-level trading activities by asset managers, we show strong evidence of asset managers engaging in strategic trading to cloak their most valuable trades. This takes the form, for instance, of a manager who sells her entire position of Microsoft on March 30, and then repurchases to re-establish the same position on April 1. This manager will be holding economically the same position throughout, yet without having to publicly signal this position. These cloaked trades earn an abnormal return of 370 basis points in the following month, or more than 36 percent per year. We further show that the same managers do not engage in such information-rich cloaked trading around other month ends (non-reporting months), nor in institutional accounts (that are not subject to the reporting requirements) at the exact same quarter-end dates. Moreover, the returns to these cloaked trades continue to accrue over the subsequent quarter and do not reverse in the following year, implying that these cloaked trades are informative about fundamental firm value, which is gradually revealed into prices