Abstract
Using hedge funds' holdings of IPO stocks, we find that stocks with hedge fund holdings beyond what can be explained by publicly available information yield abnormal returns, suggesting that hedge funds possess private information in IPO stocks. Moreover, compared to other investors, hedge funds have more predictive ability for future stock returns in post-IPO trading and are able to sell IPO stocks before underperforming periods start. Finally, hedge funds earn higher abnormal returns in “connected” stocks when their prime brokers serve as the IPO underwriters, indicating that such connection is an important source of private information for hedge funds.
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