“In the world of investment finance it is increasingly important to be well connected politically. As briefly mentioned earlier, one study by two economists looked at 351 hedge funds between the years 1999 and 2008 and found that “politically connected” hedge funds—that is, funds that hired lobbyists and made campaign contributions—had a much better rate of return on investments than those which were not. Political connections created “an abnormal rate of return of 1.4 to 1.6 percent per month.” The study explained that “connected funds possess an informational advantage in trading politically sensitive stocks.” The study also found that when a given hedge fund switched from being apolitical to getting into the political game, its performance increased by an impressive average of 2% to 2.9% per month. The economists also discovered that the more hedge funds gave to political candidates and the more they hired lobbyists, the more they tended to invest in politically sensitive stocks that were influenced by government actions. As the authors put it, “Connected fund managers exhibit a bias towards politically sensitive stocks (both in terms of trading and holdings) and they outperform significantly in these political stocks.”

Excerpt From: Schweizer, Peter. “Throw Them All Out.” Houghton Mifflin Harcourt (www.hmhco.com). iBooks.

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