Thursday, February 27, 2014

Portfolios of SEC Employee Stock Picks Earn Excess returns of 4-8.5% Per Year

From ZeroHedge:

Want To Outperform The Market? Just Trade Alongside The SEC
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.
And since not even the most sophisticated hedge funds can generate returns through shorting, maybe it is time for the government to do something right, and spin off SEC Capital as a standalone hedge fund....MORE
"Stock Picking Skills of SEC Employees" (52 page PDF)

I see that Turnkey Analyst posted earlier than ZH but no HT from ZeroHedge, or alternateively, explanation of why they were browsing the University of Virginia website. Sometimes I think ZeroHedge wants their acolytes to believe ZH is omniscient when it is actually I who Sees all, Knows some and Tells a little.
Or not.
whatevs, jus' sayin'
(stylebook: use apostrophes)