Smart money refers to the capital controlled by professional investors that have extensive knowledge, experience and sometimes insider knowledge. The smart money owners can be therefore more effective in their investments. Before making the final decision the investors make a detailed analysys of historical investement and current market situation. Less experienced investors use also an investement advice. Nowadays there are a lot of books and publications with can be used by future investors how to make a smart money. Professional investors do not have to use a unique strategy to generate big profits but they should observe what kind of information was provided with a new money (Zheng, 1998). That informations can be used to make unexpected profits in the future.
Smart money has much better chance of being correct when making decisions on entering or leaving the market. Therefore, many small investors try to monitor what large players do. In this day and age smart money, however, can be so large, that they create market trends with their decisions. According to Gruber (1996) and Zheng (1999) we can also say that selection ability is condition to make smart money. The results are visible on charts as large movements that cannot be predicted in any way by technical analysis or publicly available knowledge. Furthermore, investments which in the past brought sufficient profits may bring also good results in the future, because they are not resistant to momentum (Carhart, 1997).
Examples of investments
We can also say that more risk and active investements are more profitable. According to the historical results which have ensured that larger and more experienced capitalists make more aspicious investements. Investors can also make decision to move money from weak found to the better one, basing on public information (for example using macroeconomics indicators) (Ferson and Schadt, 1996).
One of the types of investing are Capital Venture. Capital Venture are long-term investments in the new company on the market. The aim of these investments are earn as much money as possible on the sale of shares of these companies after a certain time.
The second type of investing are hedge founds. This type of investments allows to get benefit from use of various types of investment techniques and collect fees for manage several investments. Investors usually use their knowledge from historical investments to get better profits (Boyson, 2003).
It is also worth noting that large investors have better possibilities to control and administrate their investmentes. Two main roles of investors are to sort and search the best offers on the market and manage them to have as large profit as possible. These two main roles are conductive to make “smart money”.
- Baquero G., Verbeek M. (2005). A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money. Publication in the Report Series Research in Management, 2-5.
- Sapp, T., & Tiwari, A. (2004). Does stock return momentum explain the “smart money” effect?. The Journal of Finance, 59(6), 2605-2622.
- Sørensen M. (2003). How Smart is Smart Money? An Empirical Two-Sided Matching Model of Venture Capital. The Journal of Finance, 62(6), 2725-2762.1-6.
- Zheng L. (1999). Is Money Smart?A Study of Mutual Fund Investors’Fund Selection Ability. The Journal of Finance, 54(3), 901-905.
Author: Joanna Kruk