Smart money is money that is managed by investors who are likely to outperform the market. It is the opposite of dumb money.
The evidence for the under-performance of dumb money, implies that smart money does really outperforms.
There are many investment strategies based on the idea that investors can follow smart money. These range from following a particular investor to using chartist techniques that try to use aggregated indicators of where the smart money is going.
There are a number of reasons why smart money may outperform:
- Better access to information: laws banning insider trading are not completely effective.
- Better access to research: bigger investors get more access to sell-side research and may have their own buy-side research.
- The investors themselves are smarter, or have an emotional advantage such as being relatively immune to the herd instinct apparent in bubbles.
- The money is managed with aims that make out-performance more likely, such as a longer term outlook.