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Florian Guldner, Opalesque:

While U.S. authorities are investigating numerous hedge fund firms for alleged insider trading, two researchers from the National University of Singapore have published empirical research on a different way hedge funds could capitalize on private information: Connecting with lobbyists.

In their paper called “Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers”, Jiekun Huang and Meng Gao test the hypothesis that hedge fund managers obtain an informational advantage in securities trading through their connections with lobbyists.

As political decisions can have a strong impact on the prices of “politically sensitive” stocks, connections with lobbyists who have access to non-public information (such as the likely outcome of legislative votes, regulatory proceedings, congressional investigation, and so on) could be very useful for hedge fund managers trading those stocks.

The practice of lobbyists passing political information to hedge funds has raised concerns among regulators before, triggering an SEC investigation in 2005 regarding possible violation of insider trading rules, and the introduction of the “Stop Trading on Congressional Knowledge Act”, which aims at prohibiting investors from trading securities based on private political information.

In order to analyze this phenomenon, Huang and Gao examined a da......................

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