Data Collection & Analysis
The Altana Director Alignment Strategy (ADAS) is based on our sophisticated understanding of directors’ dealings. This stems from long-term analysis conducted by the in-house fund manager and from our cooperation with researchers at University College, London and the University of Oxford.
Directors’ dealings constitute executives buying and selling of financial instruments in their own firm. An event is defined as the aggregation of directors’ purchases and sales of financial instruments in their respective stock on a given day. Generally, such transactions are legal in most countries as long as they are not based on the possession of material (substantial and precise) information. Executives may base their transactions on pre-defined regular patterns or on random mood swings, but also on, for instance, their interpretation of financial information which may differ from analysts’ expectations, knowledge of internal forecasts, a better understanding of the company’s competitive position in the market relative to competitors, or simply ‘gut feeling’. The ADAS fund strategy builds on this notion, i.e. that directors and other insiders predominantly carry out transactions based on their possession of superior knowledge or well-informed sentiment.
In most jurisdictions in which directors’ dealings are legal, executives trading own-company stock have to file their trades with the respective market authorities or exchanges. This allows outsiders, such as institutional and private investors, to include executives’ transactions into their investment decision-making. However, not all legal insider trades are equally informative. Our research shows that naively trading all director events does not lead to significant outperformance of relevant benchmarks, as executives may base their trades on multiple reasons not related to superior information (e.g. liquidity needs, tax considerations, or contractual holding requirements).
The ADAS fund strategy only trades on a subset of directors’ dealings, which carries high informational value to inform profitable trades, and excludes less meaningful transactions. This allows the fund strategy to outperform its benchmark over the long run while keeping the volatility at comparatively lower levels. The algorithm, which is used to decide on the informativeness of directors’ dealings, is grounded in a broad range of proprietary research. For instance, our research revealed the impact of market capitalisation, industry sectors, transaction sizes, and national law enforcement levels on abnormal returns following the filings of directors’ dealings. Altana Wealth research also revealed associations between corporate strategies and directors’ dealings. Moreover, proprietary research on insider sentiment showed to what extend aggregated directors’ dealings can predict market movements on US, European, and Asian markets.
All transactional data is collected real-time from the most reliable respective source, including the Securities and Exchange Commission (SEC) and major European exchanges, and stored on Altana Wealth servers to be analysed. The data is continuously collected in real time to allow for fast contextual assessment of directors’ dealings and potential trades on the event.