Surprise! Congress is trading on inside information

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.

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