Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers

Abstract:     
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. Our study provides evidence for the ongoing debate about regulatory reform governing informed trading based on private political information.

Number of Pages in PDF File: 51

Keywords: Hedge funds, lobbyists, informed trading, performance, information transfer

JEL Classification: G11, G23, G14

working papers series