60 Minutes has a great segment explaining the lack of insider trading rules for Congressmen.
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.
Recent academic research suggests hedge funds are cashing in on this insider trading loop hole as well:
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: