Does legal insider trading fly? Yes, it does, says David Miller
, CEO of Catalyst Mutual Funds
] . And he's ready to put his claim to the test with Catalyst's newest "legal insider trading" mutual fund.
Launched on April 30, the Catalyst Insider Long/Short Fund
(CIAAX) invests in stocks experiencing significant "clusters" of insider trading. Specifically, it bases its investments on considerable stock trading activity by top executives in their own companies, also gauging how many executives engage in such activity.
Both the long and short aspects — which tracks buying and selling, respectively, of stock — of the fund mimic the activity of executives when at least three executives trade a substantial amount of stock in their own company, Miller said.
"It all hinges on the basic premise that nobody really knows what a company works other than the top executives running it," Miller, who also manages the fund, said. "This is going to be one of the core strategies at Catalyst."
The technique behind legal insider trading is based on academic research, most significantly that of H. Nejat Seyhun
in his book Investment Intelligence from Insider Trading
, as well as back testing by Catalyst. Research showed that top executives generally outperform the market, where "the larger the volume by top executives, the more output there is; and the more executives, the better the output," Miller said.
Expect a followup insider buying fund utilizing similar methodology, most likely in the next three or four months. That fund, however, will focus on solely the buying movements of companies' top executives, Miller said.
Lloyd Harbor-based Catalyst Mutual was founded in July of 2006 and currently manages $300 million in assets across 11 funds. Miller manages all five internal funds, while the other six are subadvised.
Catalyst Launches First Legal Insider Trading Mutual Fund
Insiders Buy Stock for Only One Reason: They Believe the Price Will Rise; Corporate Executives and Wall Street Insiders Have Taken Advantage of Their Privileged Status for Years; The Catalyst Insider Long/Short Fund (CIAAX & CIACX) Is One of the First Mutual Funds That Allows Investors to Take Advantage of Legal Insider Trading
NEW YORK, NY, Jun 20, 2012 (MARKETWIRE via COMTEX) -- Catalyst Funds announces the launch of the first legal insider trading mutual fund. The Catalyst Insider Long/Short Fund CIAAX +1.43% CIACX +1.43% seeks to take advantage of legal insider trading by purchasing stocks experiencing significant insider buying and selling short those that are subject to large clusters of insider selling.
Corporate insiders have a huge advantage given that they know the companies they run and what they are worth better than anyone else. The Catalyst Insider Long/Short Fund seeks to profit from taking advantage of this potential opportunity.
The Securities and Exchange Commission (SEC) requires that corporate insiders disclose all of their personal transactions in their own company stock on SEC Form 4 filings. Investors in the Catalyst Insider Long/Short Fund will get the opportunity to legally invest based on insider trading filings collected from the SEC.
The Catalyst Insider Long/Short Fund (CIAAX & CIACX) is one of the only mutual funds of its kind that invests exclusively in the stocks that are experiencing the most significant clusters of insider trading. Studies have shown that stocks that are subject to substantial insider buying have historically outperformed those that are experiencing the most insider selling by a wide margin.(1) Academic research by H. Nejat Seyhun (Investment Intelligence from Insider Trading) provides strong evidence to support the practice of mimicking the activity of insiders that appears in SEC Form 4 filings. Quantitative historical analyses performed on very large datasets confirm these findings.(2)
Past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective.
Insider trading is often associated with illegal trading activity. Popular media focuses on this type of insider trading. Recall convictions ranging from Martha Stewart to the hedge fund tycoon Raj Rajaratnam. However, the term "insider trading" includes both legal and illegal conduct. The SEC defines insider trading as:
- Legal: when corporate insiders -- officers, directors, and employees -- buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC.
- Illegal: generally refers to buying or selling a security, in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.(3)
The Catalyst Insider Long/Short Fund (CIAAX & CIACX) trades legally based on trades disclosed to the government, rather than "insider information."
As one example of the investment strategy, Catalyst performed its quantitative and qualitative screening and sold short Zynga, Inc. (ticker:ZNGA). In April 2012, eight insiders (executives and directors) sold portions of their holdings. For instance, David Wehner (Chief Financial Officer) sold $4.5 million of his position in the company, a 66.5% change in shares. The adjusted closing price for Zynga on April 30, 2012 was $8.34 per share. The stock closed at $5.65 per share on June 15, 2012. This represents a 33.3% decline in value.
Of course, there is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.
Investing in the Fund carries certain risks. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund's portfolio. The Fund is non-diversified and may invest a greater percentage of its assets in a particular issue and may own fewer securities than other mutual funds. The performance of the Fund may be subject to substantial short-term changes. If a security sold short increases in price, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. There may be risks associated with the sale and purchase of call and put options. Investments in lesser-known, small and mid-capitalization companies may be more vulnerable than larger, more established organizations These factors may affect the value of your investment.
Please consider the Fund's investment objectives, risks, and charges carefully before investing. This and other important information about the Catalyst Funds can be found in the Fund's current prospectus, which may be obtained by calling your Financial Advisor or shareholder services at 1-866-447-4228. Please read the prospectus carefully before investing. The Catalyst Funds are distributed by Northern Lights Distributors, LLC, member FINRA.
- (1) Academic findings concluded that, over a 20-year period from 1975 to 1994, stocks following insider buying outperformed the market (represented by an equally-weighted portfolio of NYSE, AMEX, and NASDAQ) by 4.5% while stocks following insider selling underperformed the market by 2.7%. Using an insider buying investment strategy, this represents a 7.2% outperformance of the market. Source: H. Nejat Seyhun, Investment Intelligence from Insider Trading. Cambridge, MA: The MIT Press. 1998. Chapter 2, Table 2.2.
- (2) Historical analysis performed by Catalyst Capital Advisors LLC. Data available upon request.
- (3) Securities and Exchange Commission, http://www.sec.gov/answers/insider.htm
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