Wednesday, October 21, 2009

More Truth than Alan Murray Realizes

Alan Murray, WSJ Deputy Managing Editor and Executive Editor Online, wrote in a twitter post this morning:
Fascinating story on analyst feeding info. to Galleon. These people sound like reporters -just get paid better. (subs)
This is actually very correct. What hedge fund analysts try to do is ferret out information as to what is going on at a company so that the traders at the hedge funds can act on this information WHICH MAKES THE MARKET MORE EFFICIENT.

If a takeover bid is coming, the closer the stock gets to the takeover bid, before it is announced the more efficient the markets are. You would feel like a really dumb schmuck if you sold a stock where a takeover bid was announced the next day and the price soared. Hedge funds buying the stock on expectations (or knowledge) of a pending not yet announced takeover are simply pushing the stock closer to the takeover price, thus A. alerting you to the fact that there is unusual activity in the stock so that you shouldn't sell just yet or B. If you do sell, the price is up so that you are less of a schmuck.

The only ones that have ethical problems are leakers of news who have a responsibility to keep their mouths shut.

In the Galleon Hedge Fund insider trading case, the analysts and traders should be given a pass, as do reporters who break takeover stories, they are all just making the markets more efficient. It is the leaker of information, such as the employee at the IR firm, Market Street Partners and the McKinsey & Co. partner, Anil Konumar, both leakers in the Galleon case, that have ethical problems. They broke and ethical understanding with their clients by revealing confidential information.

1 comment:

  1. Wenzel,

    But, but... reporters don't profit off their leaks, whereas hedge funders do! And everyone knows that in America in 2009, profit is evil!

    Profit is the work of the devil! I'd rather share a prison cell with a murderer than listen to a man tell me how he made a profit.