Thursday, February 27, 2014

Want To Outperform The Market? Just Track What SEC Employees Are Trading



Goodbye SAC Capital. Hello SEC Capital.
A new study released by Rajgopal of Emory and White of Georgia State confirms what most have long known: SEC employees are immaculate stock pickers and "that a hedge portfolio that goes long on SEC employees’ buys and short on SEC employees’ sells earns positive and economically significant abnormal returns of (i) about 4% per year for all securities in general; and (ii) about 8.5% in U.S. common stocks in particular." But those wily regulators are tricky indeed: instead of frontrunning good news and outperforming on the upside, the "abnormal returns stem not from the buys but from the sale of stock ahead of a decline in stock prices." In other words, in a market in which hedge funds have given up on shorting stock, the best outperformer is none other than the very entity that is supposed to regulate and root out illicit market activity!
From the study's summary:
We use a new data set obtained via a Freedom of Information Act request to investigate the trading strategies of the employees of the Securities and Exchange Commission (SEC). We find that a hedge portfolio that goes long on SEC employees’ buys and short on SEC employees’ sells earns positive and economically significant abnormal returns of (i) about 4% per year for all securities in general; and (ii) about 8.5% in U.S. common stocks in particular. The abnormal returns stem not from the buys but from the sale of stock ahead of a decline in stock prices. We find that at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR. These results raise questions about potential rent seeking activities of the regulator’s employees.
What questions? By now it is abundantly clear that enforcing a fair and efficient market is the last thing on the minds of SEC staffers. It is now also quite clear that in such times when said staffers are not browsing porn on the taxpayers' dime, they are trading stocks on illegal, market-moving information.
Note: The above originally appeared at Zero Hedge. It should be clearly understood that because the SEC is a government regulatory body, this trading record smacks not only of insider trading by government employees, but the likelihood that agency enforcement actions in some cases may be driven by SEC employee stock positions. 
There is generally nothing wrong with insider trading in the private sector (SEE: Judge Needs a Lesson in Finance and Economics) but it is a particularly heinous act when done by government agents working at an agency where employees have the power to make life miserable for, or destroy, a company.

(ht Nick B)

5 comments:

  1. Wow, that seems like greed to me... but... but we've been told that government employees are altruistic angelic-like beings? I thought they were a level above us mere greedy capitalistic mortals? You mean... you mean they too seek personal gain and profit?... wow... how can that be?

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    Replies
    1. Just can't change good ol' human nature, eh? Not even the "Great God Government" can do it. So much for the benevolence of socialist parasites, eh, I mean government employees. :)

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  2. This is disgusting.

    Wonder if the War Street Journal or New Yuck Times will even mention it, let alone MSNBCBSFOX. Parasites.

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  3. OR,

    Get Elected, Get Your Kids Rich: Washington Is Spoiled Rotten

    Take Senator Ron Wyden’s son, Adam—directly upon graduation from his Columbia MBA program he started his own hedge fund, no doubt capitalizing on contacts he made interning at the $19-billion fund of one of his father’s supporters, David Shaw. “Not many college kids get to intern on a D.E. Shaw portfolio for the summer,” Brian Marshall, who once ran the fund, was quoted as saying in a 2011 Bloomberg article on the younger Wyden.

    It’s also fair to speculate that former Clinton Treasury Secretary Robert Rubin’s son James might have had a few family friends numbers in his Rolodex starting out as well. Rubin worked for a big New York law firm directly out of school (Harvard, then Yale), went on to hold a few policy jobs in Clinton’s FCC, then found himself at a series of investment and private equity jobs (including the private-equity arm of JPMorgan), where his employers were no doubt heartened by the thought of one of the nation’s most powerful influencers in finance talking shop over the family dinner table with their guy.

    By the time she landed a spot as a Deputy Director of Public Affairs for International Trade in the Obama administration from 2009-2011, Valeisha Butterfield-Jones, daughter of North Carolina Congressman G.K. Butterfield, had already turned an internship with Russell Simmons into a position as the Executive Director of his Hip Hop Summit Action Network (in the span of three years), founded a non-profit focused on portrayals of women in the media, and done campaign work. She now has a production company, is president of a communications and management firm, and married Dahntay Jones of the Dallas Mavericks. Her personal website also lists Buttefield-Jones as a “lifestyle expert.”

    http://www.thedailybeast.com/articles/2014/02/27/get-elected-get-your-kids-rich-washington-is-spoiled-rotten.html

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  4. They can shield themselves and maximize their returns by trading options on those stocks. It would be interesting to know if the study took only stock returns into account for their analysis. The crooks likely did even better using derivatives. Remember when Hillary made a pile on futures?

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