Giving Hedge Fund Managers an Edge

Information about what Congressmen and other Washington insiders are talking about is at a premium these days. And apparently people who are able to glean that information and make it available to hedge fund managers and other Wall Street executives can earn a pretty penny doing so.

The Wall Street Journal reports that government regulatory changes and economic initiatives have affected many businesses since the 2008 crisis, and any early warnings can have a major impact on investor success.

Recent insider trading court cases have been in the news, where employees of expert networks have been charged with violating securities laws by passing along material, nonpublic information about companies. However, securities laws do not prohibit political insiders from sharing nonpublic information about governmental affairs. In fact, it’s considered part of the job of lawmakers, staffers and lobbyists to discuss policy options and pending legislation with anyone who cares to listen, without any expectation that the information will be kept confidential.

The Journal tells of one consultant who shared details of his conversation with a Senator about upcoming debit-card legislation with two of the consultant’s hedge fund clients. The funds subsequently placed trades in Visa Inc. and MasterCard Inc. on that information.

Hedge funds are keen for information about what’s happening behind the scenes in Washington, and are willing to pay dearly for it. There are thousands of political insiders who are paid to funnel that information to hedge fund managers and big investors. Former Federal Reserve Chairman Alan Greenspan, for example, is an adviser to Paulson & Co., and former Treasury Secretary John Snow works for Cerberus Capital Management. Other hedge funds have hired former congressional staffers.

“The ultimate [investing edge] is insider information, so you want to get as close to the line as possible without crossing the line,” says Sanford Bragg, chief executive officer of Integrity Research Associates LLC, which evaluates investment-research firms. “That’s why Washington is so interesting—because there is no line.”

Thus, expert networks in the political world, serving hedge funds, have become a big business. More than 2,000 people reportedly work for expert networks in Washington, D.C., in what has become a $100 million dollar a year business. Hedge funds and other investors pay from $200 to $1,000 per hour to talk to political insiders.  And many of these people “moonlight” as advisors while holding down a full-time job in government.

What’s your take? Is it all fair game? Is this the price of doing business in the hedge fund industry, in an increasingly opaque regulatory environment? Add your comments below.

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