Capitalizing on Capitol Hill: Informed trading by hedge fund managers

This paper examines the hypothesis that hedge fund managers gain an informational advantage in securities trading through their connections with lobbyists. Using data sets on the long-equity holdings and lobbyist connections of hedge funds from 1999 through 2012, we show that hedge funds outperform passive benchmarks by 56–93 basis points per month on their political holdings when they are connected to lobbyists. Furthermore, the political outperformance of connected funds decreased significantly after the Stop Trading on Congressional Knowledge (STOCK) Act became effective. Our study provides evidence on the transmission of political information in financial markets and on the value of such information to financial market participants.