Institutional Holding Periods

Abstract

We find wide dispersion in trade holding periods for institutional money managers and pension funds. All of the funds execute round-trip trades lasting over a year; 96% of them also execute trades lasting less than one month, although average short-duration trade returns are negative. We find only limited evidence that institutions choose holding periods based on portfolio optimization and no evidence that short-duration trades are driven by the disposition effect. Our results are consistent with the agency problem that arises when clients cannot distinguish when a manager is “actively doing nothing” versus “simply doing nothing” as well as manager overconfidence.