Why A Hedge Fund Comprised Of Junior Congressional Democrats Should Outperform The Market By 9%

Tyler Durden's picture

That insider trading in Washignton occurs with a greater frequency than at Galleon is no secret. Courtesy of various loopholes, members of both the House and Senate have long been allowed to trade on inside information, something that grabbed the media's attention when back in November 2005 someone, somewhere sent the stock of USG Corp., W.R. Grace & Co., and Crown Holdings higher even though there was no public information. Only later would it become known that then-Senate Majority Leader Bill Frist would deliver a speech announcing new legislation to relieve companies of asbestos litigation. Subsequent studies (such as Ziobrowski et al's 2004 paper “Abnormal Returns from the Common Stock Investments of the United States Senate.”) confirmed substantial market outperformance by members of Senate. A few days ago, Ziobrowski et al, have released a follow up study "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives" which confirms that not only do congressional critters consistently outperform the market, but does a granular analysis of just who it is in congress that should consider leaving the public arena, and raising capital to start their own hedge fund: simply said, junior, democratic congressmen beat the market by roughly the same amount, with the same consistency (and probably with the same Sharpe ratio) that allows SAC to charge 3% and 35%.

In a nutshell, the latest stereotype is that if one is a junior democrat in Congress, and one trades for their own discretionary account, one most likely is doing so using insider information.

From the authors:

We find that stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns. The returns outperform the market by 55 basis points per month (over 6% annually). As additional evidence of information advantage, the trade-weighted portfolio of purchased stocks significantly outperforms the equal-weighted portfolio indicating that Representatives invested much larger amounts in those stocks that performed best. The regression coefficients also suggest that House Members favor the common stocks of smaller growth companies with slightly above-average risk.

Who is a better daytrader: republican or democrat?

When stock purchases are equal-weighted we find no significant abnormal returns for either Democrats or Republicans. When the  portfolios are tradeweighted, the samples of both Democrats and Republicans produce positive, statistically significant CAPM alphas. Only the Democratic, trade-weighted portfolio yields a significant positive Fama-French alpha. Furthermore, the nested test for significance of party affiliation indicates that the Democratic sample significantly outperformed the Republican sample. The Democratic sample beat the market by 73 basis points per month (nearly 9% annually) versus only 18 basis points per month (approximately 2% annually) for the Republican sample.

One explanation for this bias:

Given the almost folkloric belief that Wall Street invariably favors Republicans, the superior performance of trades made by Democratic Representatives may seem surprising. However, it should be noted that Democrats controlled the House for 10 of the 17 years covered by this study. Furthermore, Democrats were deeply entrenched in the leadership of the House for decades prior to the study. Thus when Republicans finally took control in 1995, they arguably had far less experience at handling the reins of power and may therefore have been unable to immediately enjoy all its perquisites.

Additionally, greedy junior politicians are more adept at "beating" the market than more senior ones.

In addition, stocks purchased by Democratic Representatives significantly outperform stocks purchased by Republican  Representatives. Stocks purchased by Representatives with the least seniority significantly outperformed stocks purchased by Representatives with the most seniority.

The explanation: risk versus return:

Again we find this result counterintuitive. In theory, Representatives with the most seniority possess the most power and thus should have the greatest opportunity to trade with an informational advantage. However, although the most senior Members may have the most opportunity, they may lack the strongest motive. It is no secret that money is the lifeblood of politics. Whereas Representatives with the longest seniority (in this case more than 16 years), have no trouble raising funds for campaigns, junkets and whatever other causes they may deem desirable owed to the power they wield, the financial condition of a freshman Congressman is far more precarious. His or her position is by no means secure, financially or otherwise. House members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise.

The conclusion.

In sum, the findings from this study of the U.S. House of Representatives’ common stock transactions are generally supportive of the previous study of the U.S. Senate. We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller  than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members. The nature and source or sources of information is unknown, but clearly further research is warranted. We recommend that congressional committees should be studied for abnormal returns and indications that members of those committees may favor stocks in industries their committees oversee. Abnormal returns associated with the common stocks of specific industries or companies should be investigated for patterns of potential misconduct. We suggest the examination of the relationships between campaign contributions, common stock acquisitions, and abnormal returns.

In other words, everyone is trading on inside information, but nobody more so than those who write the laws that determine just what is considered Insider information, and the penalties associated with it. In the meantime, let the public lynching spectacles of such prominently irrelevant fund managers as Raj Raj continue: the people need their bread and circuses. Especially as fund of funds round up all junior democrats and start roadshowing them to yield-hungry QIPs.

Full report:


Abnormal Returns

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66Sexy's picture
"When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is DOOMED." - Ayn Rand Atlas Shrugged
Muir's picture

 Ayn Rand: the intellectual patroness of wannabe dickheads, professional amateurs, miseducated autodidacts, soi-disant contrarians, aging arrested adolescents, and subliterate cognoscenti.

ColonelCooper's picture

Doesn't make the quote any less relevant.

Quixotic_Not's picture

Rule #1:

Never respond to trolls that dissemble while using meat-on-a-hook avatars to appeal to the base nature of uninitiated ZH viewers...

ColonelCooper's picture

Not everyone who disagrees with one's point of view is a troll.  If Muir (who has been here a LONG effing time btw) has a trollish side, it certainly isn't overbearing to the point that I even picked up on it.  Rand has a most devoted following among some of her readers.  Some simply take it as a good book with some rather ironic prophesizing.  Others think it is over written drivel.

I tend to fall somewhere in the middle of all three camps. 

But thanks for the lesson. 

 

Smiddywesson's picture

" Ayn Rand: the intellectual patroness of wannabe dickheads, professional amateurs, miseducated autodidacts, soi-disant contrarians, aging arrested adolescents, and subliterate cognoscenti."  - Muir

Listen to the guy with the bouncing boobs for his avatar.  That's a tell for real intelligence.  LOL

No offense Muir, just joking, but the left attack Ayn Rand so much, I avoid those debates.  Politics is a game to hide the real game, taking money from the weak and ignorant by force.


Pegasus Muse's picture

A most enlightening documentary. 

The Money Masters - How International Bankers Gained Control of America

 "The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole...Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money..." THE MONEY MASTERS is a 3 1/2 hour non-fiction, historical documentary that traces the origins of the political power structure that rules our nation and the world today. .... " 

http://video.google.com/videoplay?docid=-515319560256183936#

CrownThomas's picture

Really, "off with their heads" -- wow.

Long-John-Silver's picture

When the US Dollar becomes confetti the TEA Party will be replaced by the Guillotine party.

Quixotic_Not's picture

Objectivism says there are only two kinds of people in this world; creators and parasites.

Jasper M's picture

Oddly, so does Marxism. Or maybe not so oddly. 

"Us" is always much better defined in the presence of a "Them". Thus those seeking to unify a cult, er, belief system gravitate towards such dichotomies. 

as for the Congresscritters, LBJ famously defined the diferennce between House and Senate as "chicken salad, and chicken shit" – but seems to me a reliable 9% ain't chicken shit. Or even chicken feed. 

tmosley's picture

Not exactly.  Marxism divides the rich from the poor.  Thing is, there are both poor and rich creators, and poor and rich parasites.  Further, his proposals allow the parasites to take over at ALL levels.

This topic was covered extensively by FOFOA, in what is my favorite commentary from him, possibly my favorite of all time: http://fofoa.blogspot.com/2010/07/debtors-and-savers.html

Muir's picture

on objectivism in general:

“There are two novels that can transform a bookish 14-year-kid's life: The Lord of the Rings and Atlas Shrugged. One is a childish daydream that can lead to an emotionally stunted, socially crippled adulthood in which large chunks of the day are spent inventing ways to make real life more like a fantasy novel. The other is a book about orcs.”

Ahmeexnal's picture

Idiocy has no boundaries. 

Tolkien's works are more than meet the eye.  The fact that you were only able to grasp the "dragon, elf, hobbit, orc, dwarf" context should be enough proof about your poor/lacking analytical skills.  Try re-reading Tolkien with open eyes. "Farmer Giles of Ham" is a short story, an anarchist's guidebook on how to take a stand against authoritatian fascist rule.

Atlas Shrugged is a book TPTB don't want the sheeple to read and UNDERSTAND, the reason being it lays the foundation for their collapse.  But as in AS, you don't need the masses in order to bring the system down. It only takes what Toffler termed a "pivotal minority".

Muir's picture

"tlas Shrugged is a book TPTB don't want the sheeple to read and UNDERSTAND"

You fucking ignorant transexual.

__

TBTB are Atlas Shrugged!!!

Alan Greenspan was an acolyte of hers, for heavens sake.

 

Just how stupid are you?

_

edit: question was rhetorical

Ahmeexnal's picture

Wrong.

TPTB hijacked AS.

Just like the church of Rome hijacked the teachings of Jesus (if such a person did in fact exist, which is highly debatable).

Once again, you are living proof that idiocy has no boundaries. And your insults give a clear insight into your own sexual demons.  Now we all know the origin of your fake bouncing boobs avatar. 

 

 

Quixotic_Not's picture

The *truth* is always visible to the initiated...

But the soul which has been polluted, and is impure at the time of her departure, and is the companion and servant of the body always, and is in love with and fascinated by the body and by the desires and pleasures of the body, until she is led to believe that the truth only exists in a bodily form, which a man may touch and see and taste and use for the purposes of his lusts -- the soul, I mean, accustomed to hate and fear and avoid the intellectual principle, which to the bodily eye is dark and invisible, and can be attained only by philosophy -- do you suppose that such a soul as this will depart pure and unalloyed? ~ Plato

disabledvet's picture

you forgot to add "Penthouse."

Medea's picture

Stupid people say there are only two kinds of people in this world. Go ahead and bag that pseudo-intellectual gibberish.

DeadFred's picture

There are only two types of people, people who put people into types and those that don't.

S.N.A.F.U.'s picture

There are only 10 types of people in the world: Those who understand binary, and those who don't.

Anonymouse's picture

Looking forward to reading this. It is highly offensive (and dangerous to the republic) how the laws we must live be do not apply to our "leaders and role models"

A couple of years ago, I started playing around with capturing numbers from congressional personal investment disclosure, but as it is all scanned pdf, would be a highly manual process and since holdings and net worth are reported in wide ranges, would be difficult to determine true performance or to aggregate.  In the long haul taking the range mid-point would be reasonable, but not in the short run.  Of course, you also would have to adjust for spousal income, outside business income, books, etc., that could legitimately (or illegitamately) affect changes in net worth.  You also would only know of holdings on an annual-ish basis.  And of course there always is Charlie Rangel risk (e.g., timeliness and accuracy of reporting).

Definitely interested in this report and how it was done.  I have no doubt there is significant graft and corruption, but how to wash out the noise to determine trends and indictable offenses is another question altogether.

Quixotic_Not's picture

The state of nature has a law of nature to govern it, which obliges every one: and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions ~ John Locke 1690


Whenever the legislators endeavor to take away and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any further obedience. ~ John Locke 1690

Which manifested as this:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Perhaps common sense will arise from the ashes, and the dogfood cans?

NAH....

DaveyJones's picture

my favorite law professor was a bit of an anarchist and swore that most modern legislation was nothing more than someone trying to get a buck out of someone else often the taxpayer. This was in the eightees and I used to debate him. Used to.

aerojet's picture

It's the surest game in town--make car seats and then go lobby Congress to make sure every kid must sit in one.  Or force people to install sprinkler systems, not have lead paint in their houses.  I'm surprised that hair salons don't have lobbyists getting laws passed to prevent bad hair days.

beastie's picture

There is a way to do what you want to do. Head over to screwtapefiles.blogspot.com and ask Warren how he sucks the SLV pdf files into a database which he has made available to the public.

holdbuysell's picture

Write your representatives to request a congressional investigation. (sarc)

 

I am Jobe's picture

LOL. They self govern and abide by ethics.

Maddeafandblind's picture
Why A Hedge Fund Comprised Of.....etc

 

"comprised of"

 

why don't you learn English?

 

 

Bendromeda Strain's picture

Your eye is clearly off the ball.

Of course it is - he's mad, deaf & blind. Unfortunately, WebMD reports that it is likely too late for penicillin.

Maddeafandblind's picture

er, no.

comprise: to include; contain; to constitute the whole of; consist of

ergo: "comprised of"'s synonym would therefore be "consists of of"

I realise of course that correct English usage is an almost insurmountable hurdle for most Americans.

To say that something "wrong" becomes "right" because everybody's doing it is sloppy in the extreme.

Innit.

Anonymouse's picture

It's fair to say you are missing the forest for the trees.  Irregardless (;-)), acc to Meriam-Webster:

3: compose, constitute <a misconception as to what comprises a literary generation — William Styron> <about 8 percent of our military forces are comprised of women — Jimmy Carter>
Usage Discussion of COMPRISE Although it has been in use since the late 18th century, sense 3 is still attacked as wrong. Why it has been singled out is not clear, but until comparatively recent times it was found chiefly in scientific or technical writing rather than belles lettres. Our current evidence shows a slight shift in usage: sense 3 is somewhat more frequent in recent literary use than the earlier senses. You should be aware, however, that if you use sense 3 you may be subject to criticism for doing so, and you may want to choose a safer synonym such as compose or make up.
p.s. I read this while eating at my favorite restaurant "The La Trattoria"
Sean7k's picture

Well played. The grammar nazi's can be a real annoyance. 

Sean7k's picture

The use of that is superfluous, but you're an expert, no?

NotApplicable's picture

Speaking of standards, your ID is an incoherent mess. MadDeafAndBlind or Mad_deaf_and_blind are both an acceptable form to replace the gibberish you've chosen to represent yourself.

Please learn (and use) Netiquette.

kthxbye

ColonelCooper's picture

I have an idea.  Why don't you try to crank out about six or seven new articles on a holiday weedend Sunday morning, so that your readers won't get bored with dead threads?  In doing so, see if you manage a typo or two, or perhaps mix up a their/there/they're; maybe an its/it's? 

I have another idea.  Pull that rough cut two by four out of your ass and club yourself over the head with it.

Douchebag.

Sisyphus's picture

Thank you for that explaination. I waited with baited breast to learn about the correct usage.

disabledvet's picture

i love baited breasts myself.  "like a fish...i swim towards them!"

serotonindumptruck's picture

For all intensive purposes, it is a mute point. Proper grammer will be the death nail for the interwebs.

knowless's picture

You mean intensive porpoises right?

traderjoe's picture

Wow, you've been here for a year - and that's what you care about? Fucktard.

I am Jobe's picture

Is there a market for The Guillotine ? I think this would be the best investment there is.