Insider Trading–Congress loves it!

November 13, 2011 Brainwave
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60 Minutes has a great segment explaining the lack of insider trading rules for Congressmen.

http://www.cbsnews.com/video/watch/?id=7388130n&tag=contentBody;storyMediaBox

Amazing, isn’t it? You can sit on the healthcare committee, learn that the new bill will cut insurance companies profits by 99%, and short insurance companies to your heart’s content.

WTF?

Recent academic research suggests hedge funds are cashing in on this insider trading loop hole as well:

https://www2.bc.edu/~pontiff/Conference%20Papers/HF%20Lobbyists%2020101119.pdf

In this paper, we examine the hypothesis that hedge fund managers obtain an informational advantage in securities trading through their connections with lobbyists. Using datasets on hedge fund long-equity holdings and lobbying expenses from 1999 to 2008, we show that hedge funds that are connected to lobbyists tend to trade more heavily in politically sensitive stocks than do non-connected funds. Furthermore, using a difference-in-differences approach, we find that connected hedge funds, relative to non-connected ones, outperform by 1.6 to 2.5 percent per month on their holdings of politically sensitive stocks, relative to their non-political holdings. These results suggest that hedge fund managers exploit private information, which can be an important source of their superior performance. Our study provides evidence for the ongoing debate about regulatory reform governing informed trading based on private political information.

I went ahead and polled a few of the neighborhood kids to see what they thought about their Congressmen/women trading on insider information. So not only are they screwing up our kids’ future, but now they are also extracting wealth via information advantages.

Pictures are worth a thousand words:

 



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About the Author

Wesley R. Gray, Ph.D.

Dr. Gray has been an active participant in financial markets for over 15 years. His experience includes positions as a Captain in the United States Marine Corps, as a finance professor at Drexel University, and as a portfolio manager for a special-situations hedge fund. Education and entrepreneurship has been the focus of his professional endeavors and his research interests are focused on the performance of portfolio managers and behavioral finance. Dr. Gray is currently the Executive Managing Member of Alpha Architect, an SEC-Registered Investment Advisor. Dr. Gray has published two books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army and QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. His work has been highlighted on CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.