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Tomorrow Is Another Day: Stocks Active Mutual Funds Overweight Predict the Next-Day Market

How efficient are securities markets? Do professional investors such as mutual fund managers have the ability to exploit superior information? If so, is that only micro-level information about individual firms, or are they also informed about economy-wide and market-wide prospects? These are some of the most fundamental questions in the study of finance. This paper shows that active mutual fund managers possess, and effectively incorporate, information about future short-term movements of the entire stock market into security prices, where "short term" means over the next day. Specifically, we find that when high active-mutual-fund ownership stocks outperform, the market tends to do well the next day, and vice versa. These effects are modest day by day but are quite large in the aggregate – trading the S&P 500 futures daily based on this phenomenon delivers an annualized alpha of 12% with negative market beta and an information ratio of 0.6, despite the fact that our tools are blunt: the strategy does not employ any data of mutual fund trades. Various additional tests further suggest that the novel short-term market return predictability yields from active mutual fund managers’ collective information advantage as opposed to informed fund flows or temporary price pressure.