11 Smart Money
Smart Money factors are known factors in literature, and simply an effect that tries to identify funds who are receiving additional flows.
EPFR has a set of 6 daily Smart Money factors, which are based on active manager sentiment and fund activity.
The idea behind the following “Smart Money” indicators is to mimic the actions of any funds receiving inflows, and do the opposite to those receiving outflows. The rationale is that investors follow, and invest in, funds that outperform. Thus, “Smart” funds receiving inflows will eventually increase their positions towards stocks that they already hold, subsequently creating additional flows into the stocks themselves.
References
[1] Lou, Dong. “A flow-based explanation for return predictability.” The Review of Financial Studies 25.12 (2012): 3457-3489.3.
for more information on smart money effect please refer to academic literature resources
FloTrend
FloTrend is calculated by the net change in flow allocations
\[\text{FloTrend} \equiv \frac{\sum \Delta \omega \times \varphi}{\sum | \Delta \omega \times \varphi|}\]
where:
\(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \Delta \omega & \equiv \text{change in weight from prior month} \end{align}\)
Interpretation FloTrend
A positive value indicates a positive manager sentiment towards a stock, as their weightings have increased, as well as high investor sentiment and strong inflows to the same fund.
The more positive the indicator, the larger the increase in allocation towards the stock, or the higher the inflow, or both.
Example FloTrend
Below shows a snippet of what EPFR’s FloTrend Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/FloTrend/Aggregate/StockFlowTrend-202212.txt'
| ReportDate | HSecurityId | SecurityName | FloTrend | |
|---|---|---|---|---|
| 431827 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | 0.5381 |
| 436609 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | 0.6323 |
| 431717 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | 0.5793 |
| 441029 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | -0.3620 |
| 439560 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | 0.1156 |
| 440828 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | -0.2954 |
| 444826 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | 0.2991 |
FloDiff
This indicator places more emphasis on the fund in/outflows, by removing any magnitude associated with changes in allocations and simplifying them to a + or -1.
\[\text{FloDiff} \equiv \frac{\sum \text{sgn}(\Delta \omega) \times \varphi}{\sum |\varphi|}\] \(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \Delta \omega & \equiv \text{change in weight from prior month} \end{align}\)
Interpretation FloDiff
A positive value tells us that more flows have been directed towards funds increasing their allocations to the stock. Similarly, a negative value indicates that more flows have been driven towards funds decreasing their position towards the stock.
Example FloDiff
Below shows a snippet of what EPFR’s FloDiff Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/FloDiff/Aggregate/FlowDiff202212.txt'
| ReportDate | HSecurityId | SecurityName | FloDiff | |
|---|---|---|---|---|
| 431827 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | 0.4123 |
| 436609 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | 0.5354 |
| 431717 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | 0.4868 |
| 441029 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | -0.3512 |
| 439560 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | 0.2711 |
| 440828 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | 0.4706 |
| 444826 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | 0.3611 |
FloDiff2
\[\text{FloDiff2} \equiv \frac{\sum \Delta \omega \times \text{sgn}(\varphi)}{\sum |\Delta \omega|}\] \(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \Delta \omega & \equiv \text{change in weight from prior month} \end{align}\)
Interpretation FloDiff2
A positive value tells us that more flows have been directed towards funds increasing their allocations to the stock by larger amounts. Similarly, a negative value indicates that more flows have come out of funds increasing their allocations to the stock by larger amounts.
Conversely to the FloDiff indicator, this one places more emphasis on the changes in allocations, by removing any magnitude associated with fund in/outflows and simplifying them to a + or -1.
Example FloDiff2
Below shows a snippet of what EPFR’s FloDiff2 Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/FloDiff2/Aggregate/FlowDiff2202212.txt'
| ReportDate | HSecurityId | SecurityName | FloDiff2 | |
|---|---|---|---|---|
| 464869 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | 0.06042 |
| 469674 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | 0.07778 |
| 464758 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | 0.15402 |
| 474130 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | -0.14313 |
| 472647 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | -0.20795 |
| 473928 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | -0.19234 |
| 477959 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | -0.04263 |
ActWtTrend
\[\text{ActWtTrend} \equiv \frac{\sum \omega^{+} \times \varphi}{\sum |\omega^{+} \times \varphi|}\] \(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \omega^{+} & \equiv \text{the difference between each fund’s reported weight in a stock and the fund-weighted average of a peer group of funds with the same geographic mandate} \end{align}\)
Interpretation ActWtTrend
A positive value indicates a positive manager sentiment towards the stock, as their active weights are bullish, as well as high investor sentiment and strong inflows to the same fund.
The more positive the indicator, the larger the active weight towards the stock, or the higher the inflow, or both.
Example ActWtTrend
Below shows a snippet of what EPFR’s ActWtTrend Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/ActWtTrend/Aggregate/ActiveWeightTrend202212.txt'
| ReportDate | HSecurityId | SecurityName | ActWtTrend | |
|---|---|---|---|---|
| 363999 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | -0.3852 |
| 368367 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | -0.2955 |
| 363894 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | -0.3104 |
| 372384 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | -0.3513 |
| 371042 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | 0.2564 |
| 372191 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | -0.1551 |
| 375715 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | 0.1002 |
ActWtDiff
This indicator places more emphasis on the fund in/outflows, by removing any magnitude associated with active weights and simplifying them to a + or -1.
\[\text{ActWtDiff} \equiv \frac{\sum \text{sgn}(\omega^{+}) \times \varphi}{\sum |\varphi|}\] \(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \omega^{+} & \equiv \text{the difference between each fund’s reported weight in a stock and the fund-weighted average of a peer group of funds with the same geographic mandate} \end{align}\)
Interpretation ActWtDiff
A positive value tells us that more flows have been directed towards funds that are bullish towards the stock compared with its peers. Similarly, a negative value indicates that more flows have been driven towards funds that are bearish toward the stock compared with its peers.
Example ActWtDiff
Below shows a snippet of what EPFR’s ActWtDiff Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/ActWtDiff/Aggregate/ActiveWeightDiff202212.txt'
| ReportDate | HSecurityId | SecurityName | ActWtDiff | |
|---|---|---|---|---|
| 437298 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | 0.16394 |
| 442100 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | 0.22032 |
| 437188 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | 0.17705 |
| 446538 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | 0.08301 |
| 445064 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | 0.37416 |
| 446337 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | 0.23921 |
| 450346 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | 0.27010 |
ActWtDiff2
Conversely to the ActWtDiff indicator, this one places more emphasis on active weights, by removing any magnitude associated with fund in/outflows and simplifying them to a + or -1.
\[\text{ActWtDiff2} \equiv \frac{\sum \omega^{+} \times \text{sgn}(\varphi)}{\sum |\omega^{+}|}\] \(\begin{align} \varphi & \equiv \text{dollar flow into a fund} \\ \omega^{+} & \equiv \text{the difference between each fund’s reported weight in a stock and the fund-weighted average of a peer group of funds with the same geographic mandate} \end{align}\)
Interpretation ActWtDiff2
A positive value tells us that more flows have been directed towards funds that are more highly bullish towards the stock compared with its peers (i.e. the active weight is larger). Similarly, a negative value indicates that more flows have come out of funds that are more highly bullish towards the stock compared with its peers.
Example ActWtDiff2
Below shows a snippet of what EPFR’s ActWtDiff2 Files contain:
Location: '/StockFlows5.0/QuantitativeFactors/Daily/ActWtDiff2/Aggregate/ActiveWeightDiff2202212.txt'
| ReportDate | HSecurityId | SecurityName | ActWtDiff2 | |
|---|---|---|---|---|
| 384729 | 12/30/2022 12:00:00 AM | 7041220 | Apple Inc Common Stock | -0.07822 |
| 389097 | 12/30/2022 12:00:00 AM | 7049454 | Tesla Inc Common Stock | -0.19218 |
| 384623 | 12/30/2022 12:00:00 AM | 7041046 | Amazon.com Common Stock | -0.21606 |
| 393116 | 12/30/2022 12:00:00 AM | 7057091 | Microsoft Corp Common Stock | -0.12586 |
| 391772 | 12/30/2022 12:00:00 AM | 7054419 | Exxon Mobil Corp Common Stock | -0.09212 |
| 392923 | 12/30/2022 12:00:00 AM | 7056752 | Netflix Inc Common Stock | -0.27254 |
| 396450 | 12/30/2022 12:00:00 AM | 7063679 | Visa Inc USA Class A | -0.24982 |