New York – When is inside information not illegal? When it comes from lobbyists working the corridors of power in Washington DC. This anomaly combined with the expansion of governmental influence has boosted demand for political intelligence research. Lobbyist firms are a key source of political intelligence as investors look for insights on pending legislation and regulation. We have identified thirty-three firms providing political intelligence and policy research, up dramatically from a few years ago.
Origins of Political Intelligence
As with many alternative research trends, political intelligence research started with hedge funds searching for alpha-generating information. Hedge funds found that Washington can be a gold mine of market-moving information, easily gathered by the politically connected. Funds hire lobbyists — not to influence government, but to tell them what it’s going to do. As a result, lobbying firms have ramped up their “political-intelligence” units and charge hedge funds between $5,000 and $20,000 a month for tips and predictions.
Wall Street has had longstanding interest in interpreting Washington. In the 1980s, stock arbitrageur Ivan Boesky hired a team of lobbyists in Washington to tell him if Congress would block Standard Oil Co.’s takeover of Gulf Corp. Hearing that the merger would be approved, Boesky made money on his risk arb positions. Although Boesky later pleaded guilty in one of Wall Street’s biggest insider-trading scandals, the information he received from Washington was not part of his prosecution. More on this in a minute.
Political intelligence research started becoming popular with hedge funds around five years ago. The catalyst was pending asbestos regulation which hedge funds found to be a great way to play a handful of stocks such as USG Corp., W.R. Grace & Co. and Crown Holdings Inc. For more than four years, Congress had considered legislation that would end the asbestos difficulties by creating a trust fund to cover medical costs and resolve the lawsuits. Every change in prospects for the bill had a direct impact on the stocks, giving an advantage to the funds who got the information soonest.
Hedge funds such as Elliott & Associates, D.E. Shaw & Co. and Angelo Gordon & Co. joined lobbyists’ meetings with lawmakers starting in late 2003. They paid about $80,000 in annual membership fees to join a lobbying coalition, the Financial Institutions for Asbestos Reform, which advocated on behalf of financial institutions that owned large stakes in firms with asbestos liabilities.
Success with asbestos led to other topics such as Internet gaming, Medicaid reimbursement, foreign ownership of U.S. ports and corporate tax legislation. Political intelligence research became an increasingly popular with hedge funds.
Remarkably, it is not illegal for lawmakers to disclose information that is not publicly known about the workings of Congress, even if it could affect stock prices. Congressional ethics rules are violated only if congressional staff profit directly. The Securities and Exchange Commission has apparently investigated instances where stocks have moved prior to the release of governmental information, and no enforcement actions have been taken. It appears that the passing of market-sensitive information by lobbyists to investors does not violate insider-trading law.
Employees of publicly traded companies are constrained by insider-trading laws, which also prevent investors from trading public securities using material, non-public information that has been passed on improperly. But in most cases, members of Congress and their aides don’t have a duty under the law to keep information private. They routinely exchange information about politics and policy with lobbyists — who may then pass the information on to investors.
Lobbyists have to disclose their work for clients seeking to influence government, but are not required to disclose political intelligence activities. Lobbyists acting as advocates for a company on an issue have found they can also serve investors looking to trade on information about the same issue. Congressional staffers complain they now receive nearly as many phone calls from lobbyists asking about the status of legislation as they get from lobbyists asking to change legislation.
The SEC launched an informal probe in 2005 into whether and how information may have reached Wall Street from then-Senate Majority Bill Frist’s office because the stock prices of some companies with asbestos-related liabilities rose before the announcement of a full Senate vote on an asbestos trust fund bill. Nothing apparently came of the probe.
Inside information is the ultimate alpha-generator, so inside information that can be obtained legally is hugely attractive to investors. This, when combined with the greatly increased scope and reach of government under Obama, is creating a tremendous surge in demand for political intelligence. In researching our upcoming Integrity ResearchFocus report on policy research, we have identified thirty-firms focusing on political intelligence and policy research, up dramatically from just a few years ago. In an era where the Federal Reserve has become one of the world’s largest hedge funds, it is only appropriate that lobbyist firms in Washington become the new epicenter of investment research.