We’ve heard about insider trading by politicians and the need to stop it. But information wants to be free. Information in Washington flows through many gullies and streams. It shouldn’t be surprising that it comes through lobbyists as well. Or that hedge funds are there to scoop it up.
Huang and Gao, Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers, have the story:
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 those that do not. We further show that connected hedge funds perform significantly better on their holdings of politically sensitive stocks. 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 in politically sensitive stocks, relative to non-political stocks. 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.
From the conclusion:
Our paper also sheds light on the current debate regarding the regulation on trading on congressional information. While there is evidence suggesting that U.S. Senators make abnormal returns by trading on private information they obtain from their jobs (Ziobrowski, Cheng, Boyd, and Ziobrowski, 2004), we show that informed trading based on private political information can be more widely spread since hedge funds, through their lobbyist connections, can exploit superior information by trading political stocks.
