What Is Smart Money?
Smart money is the capital that is being controlled by institutional investors, market mavens, central banks, funds, and other financial professionals. Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success.
- Smart money is capital placed in the market by institutional investors, market mavens, central banks, funds, and other financial professionals.
- Smart money also refers to the force that influences and moves financial markets, often led by the actions of central banks.
- Smart money is invested on a much larger scale than retail investments.
Understanding Smart Money
Smart money is cash invested or wagered by those considered experienced, well informed, “in the know,” or all three. There is little empirical evidence to support the notion that smart-money investments perform better than non-smart-money investments; however, such influxes of cash influence many speculation methods.
The term “smart money” comes from gamblers who had a deep knowledge of the sport they were betting on or insider knowledge that the public was unable to tap into. The investing world is similar. The populace perceives that the smart money is invested by those with a fuller understanding of the market or information that a regular investor cannot access. As such, the smart money is considered to have a much better chance of success when the trading patterns of institutional investors diverge from retail investors.
Smart money also refers to the collective force of big money that can move markets. In this context, the central bank is the force behind smart money, and individual traders are riding the coattails of the smart money.
In the context of gambling, smart money refers to those who earn a living on their bets; many gamblers use historical mathematical algorithms to decide how much and on what to wager.
Identifying Smart Money
To identify smart money, one should look for the following signs:
- Large transactions: Smart-money investors often make large, strategic investments in companies that they believe will perform well in the long term. Thus, one should perform some level of volume analysis of securities or the derivatives to determine where the smart money typically is or has recently gone.
- Insider buying: Insiders such as company executives or board members are considered smart money because they typically would have additional information on the respective company that they are a part of. When these individuals purchase shares of their own company, it can be a sign of confidence in the company’s future prospects.
- Places with strong growth potential: Smart-money investors often focus on sectors or industries that are expected to experience significant growth in the future, such as technology or healthcare.
- Long-term investment horizon: Holding onto investments for several years and allowing these investments to grow and mature is typically a sign of smart money.
- Fundamental analysis: Smart-money investors typically conduct in-depth fundamental analysis, including analyzing financial statements, management teams, and market trends.
Knowing how to spot smart money does not mean one should refrain from conducting their own research and analysis before making any investment decisions.
Tracking Smart Money
There are several ways to track smart money in the financial markets. Some methods include:
- CFTC filings: The Commodity Futures Trading Commission (CFTC) requires large traders, including institutional investors and hedge funds, to report their positions in futures contracts. These reports, known as Commitments of Traders (COT) reports, can provide valuable information about the trading activities of smart-money investors.
- Volume analysis: Smart-money investors often make large trades that can be detected by analyzing trading volumes from various securities and derivatives. From this analysis, one can determine whether smart money is buying or selling.
- Insider trading reports: Insider trading reports can provide valuable information about the transactions of company insiders, which can be a sign of smart-money activity.
- 13F filings: Institutional investors with more than $100 million in assets under management are required to file a quarterly report called a 13F with the Securities and Exchange Commission (SEC). These reports disclose the institution’s holdings of publicly traded securities, providing insight into the investment strategies of smart-money investors.
- Hedge fund databases: Hedge funds are considered smart money. There are a number of databases that track the holdings of hedge funds. These databases can be a good source of information about which stocks smart-money investors are trading or investing.
- News and market sentiment analysis: Smart-money investors often have access to information and resources that allow them to analyze market sentiment and make informed investment decisions. By tracking news and sentiment analysis, investors can get a sense of the direction of the market and whether smart-money investors are bullish or bearish.
The Scale of Smart Money
Investors with large followings, such as Warren Buffett, are considered smart-money investors, but the scale of their activities is not always taken into account. When the cash reserves at Buffett’s company, Berkshire Hathaway, accumulate and are not invested, this is definitely a sign that Buffett does not see many value opportunities in the market. However, Buffett functions on a different scale. A $25,000 investment is not too significant in a billion-dollar portfolio.
Buffett’s smart money acquires companies rather than takes a position. Institutional investors of Buffett’s size need scale for overall portfolio impact. Therefore, even when the smart money is out of value picks in the current market conditions, it does not mean that opportunities—particularly for modestly sized stocks—are absent.
What is the typical transaction size of smart money?
Smart-money transactions can range from tens of millions to hundreds of millions or even billions of dollars. These investors often are able to negotiate favorable terms and access to exclusive investment opportunities due to their size and expertise.
Who is considered smart money?
Institutional investors, hedge funds, private equity firms, high-net-worth individuals (HNWIs), corporate executives, and board members of large companies are all considered smart money.
What are the characteristics of smart money?
Smart-money investors are often highly analytical and research-driven, using a variety of tools and resources to analyze the financial markets and identify investment opportunities. They often have a long-term investment horizon and focus on building portfolios that would generate consistent returns over time. Also, smart-money investors often have a disciplined approach to investing, with a clear investment criteria and a process for evaluating investment opportunities.
The Bottom Line
Smart money refers to investments made by experienced investors, such as institutional investors, hedge funds, or private equity firms, with a proven track record of success in the financial markets. These investors typically have access to significant resources and deep understanding of the markets, and they often focus on sectors or industries with strong growth potential.
To track smart money, investors can analyze data sources such as CFTC filings, volume analysis, insider trading reports, 13F filings, news analysis, and market sentiment analysis. While identifying smart money can provide valuable insights, it is important to conduct thorough research and analysis before making any investment decisions.