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Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers

55 Pages Posted: 13 Nov 2010 Last revised: 24 Feb 2017

Meng Gao

University of Illinois at Urbana-Champaign - Department of Finance

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: November 10, 2015

Abstract

This paper examines the hypothesis that hedge fund managers gain an informational advantage in securities trading through their connections with lobbyists. Using datasets on the long-equity holdings and lobbyist connections of hedge funds from 1999 through 2012, we show that hedge funds outperform passive benchmarks by 56 to 93 basis points per month on their political holdings when they are connected to lobbyists. Furthermore, the political outperformance of connected funds decreased significantly after the STOCK Act became effective. Our study provides evidence on the transmission of private political information in financial markets and on the value of such information to financial market participants.

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

JEL Classification: G11, G23, G14

Suggested Citation

Gao, Meng and Huang, Jiekun, Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers (November 10, 2015). Journal of Financial Economics (2016) 121, 521-545.; AFA 2012 Chicago Meetings Paper; Fifth Singapore International Conference on Finance 2011 . Available at SSRN: https://ssrn.com/abstract=1707181 or http://dx.doi.org/10.2139/ssrn.1707181

Meng Gao

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jiekun Huang (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

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