What Is Cherry Picking?

Cherry picking is the process of choosing investments and trades by fol✤lowing other investors and ins🌠titutions that are considered reliable and successful over the long term. 

Cherry picking is done by both professional and retail investors alike. Typically, cherry picking doesn't involve research but instead, invo🎃lves using the research of other reliable sources. Although the process of cherry picking can lead to choosing top securities, it can also lead to investors overlooking the broader market metrics.

Cherry picking can alꦇso be referred to as the fraudulent practice of allocating profitable or unprofitable trades by invest𒆙ment managers and their staff to certain accounts preferentially.

How Cherry Picking Works

Cherry picking can be an effective way to generate returns and is often used by both individual investors and 澳洲幸运5官方开奖结果体彩网:fund managers. Cherry picking can be helpful for investors who are unfamiliar with the process of stock selection and investment research. These novice investors can choose to invest in the top securities of a particular 澳洲幸运5官方开奖结果体彩网:mutual fund or portfolio. A mutual fund is a basket of securities or stoc𝄹ks purchased by pooled funds and actively managed by a fund manager. However, cherry picking is not considered to be a best practice for comprehensive analysis and investment decisions.

Individual Investors

Individual investors may find success in following top-performing fund managers or mutual funds and choosing to invest in the best-performing stocks from their portfolios. Cherry picking can be a quick way to identify stoඣcks for investment. Since it does not require deep analysis or research from a broad universe, it can reduce the amount of time required for identifying investments.

For example, an individual investor may be interested in stocks from the 澳洲幸运5官方开奖结果体彩网:semiconductor market category. Rather than having to research all the stocks that deal with semiconductors within the exchanges, an investor may instead look at a few mutual funds investing exclusively in the semiconductor category. From there, they may choose to further investigate and in🍸vest in some of the best performing s✤ecurities.

Fund Managers

Fund managers are typically required to do intensive research when choosing investments for 澳洲幸运5官方开奖结果体彩网:actively-managed funds. Security investment in the portfolio is typically dictated by the fund’s investment strategy, which is outlined in its marketing materials and 澳洲幸运5官方开奖结果体彩网:prospectus.

In some cases, fund managers may cherry pick top investments fro🌳m sources they deem to be reliable. Adding these chosen securities to the portfolio is typically outside of the standard procedure for their investment strategy. Some fund managers may integrate investments and proprietary investment research across different funds from the same investment company. While intended to be a collaborative investment approach, this type of strategy can generally be viewed as cherry picking.

Cherry Picking and Fraud

Another version of cherry picking involves the fraudulent practice of allocating winning trades to an adviser's personal account or to favored clients–a process banned by the U.S. 澳洲幸运5官方开奖结果体彩网:Securities 🦄and Exchange Commission (SEC). The SEC is responsible for maintaining a fair and orderly functioning securities markets.

Typically, investment managers initiate block orders in the market to buy or sell for all of their customer accounts simultaneously. Block orders or aggregated orders are processed electronically through 澳洲幸运5官方开奖结果体彩网:order management systems. Those trades can have either gains or losses a𓂃ssociated with♓ them. 

The fraudulent act of cherry picking involves investment managers selecting specific profitable or unprofitable trades and allocating them in a manner of their choosing. For example, the investment manager might allocate the profitable♐ trades to their own personal account or to certain clients in order🥀 to give them preferential treatment.

Conversely, the losing trades might be allocated to other accounts of the investment manager's choosing. Any trades that were allocated to the investment manager's personal account or the employees of the firm would be done at the expense of the clients of the investment management firm.