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Investment Firm Offers First 'Legal Insider Trading Mutual Fund'

Bruce Carton | June 20, 2012

Insider trading is a major topic on this topic, but it is almost always about the illegal form of insider trading. Of course, a perfectly legal form of insider trading exists, as well: when officers, directors, and other employees of a company buy and sell the company's stock and report their trades to the SEC on Form 4.

Today, a company called Catalyst Funds announced that it is launching the Catalyst Insider Long/Short Fund, which it claims is the "first legal insider trading mutual fund." The strategy of the Catalyst Insider Long/Short Fund will be to "seek[] to take advantage of legal insider trading by purchasing stocks experiencing significant insider buying and selling short those that are subject to large clusters of insider selling."

In a press release today, Catalyst Funds explains that "studies have shown that stocks that are subject to substantial insider buying have historically outperformed those that are experiencing the most insider selling by a wide margin." The firm points to H. Nejat Seyhun's research ("Investment Intelligence from Insider Trading") in support of this point. Catalyst Funds says that it will use the SEC Form 4 filings to allow investors in the new fund to legally invest based on insider trading filings.

Not all insider trades are a reflection of the insider's opinion of the future stock price, of course. Some insiders must buy or sell for personal reasons or as part of a pre-arranged trading plan, and Catalyst Funds is quick to add that "past performance does not guarantee future results and there is no assurance that the Fund will achieve its investment objective." It will be interesting to see how this fund performs over time.