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I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto ins

I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors. It's just too hard to consistently be smarter than the market on both your long and short bets, especially when it's a larger cap stock whose float has constant inflows and outflows of institutional capital. That said, there are other asset classes which, ipso facto, do not lend themselves to insider trading, such as commodities and distressed debt. And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much. * I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.

PhantomGremlin 12y ago
> long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors You're probably right. Especially considering how big the fees were. Stevie's firm took 3% of assets for expenses plus 50% of the profits.[1] That's a very high hurdle. The standard hedge fund fee is 2%/20% and even that is high enough that many funds don't beat the S&P (or whatever they're using as a benchmark) after fees and expenses. BTW, Bess Levin at the site I linked to below is great for irreverent and snarky comments about Wall Street. [1] http://dealbreaker.com/2011/02/absurd-speculation-that-sac-capital-might-lower-its-fees-on-account-of-investor-demand-can-be-nipped-in-the-bud-right-now/ http://dealbreaker.com/2011/02/absurd-speculation-that-sac-c...
bdkoepke 12y ago
We had a manager at BP come and present at my University a few years ago on commodity trading. When he as discussing how BP consistently outperformed the market he didn't call it insider trading directly. If I recall his words were "BP leverages our superior market knowledge to outperform the market". In other words they had significant non-public information due to the fact that BP owns a significant amount of the commodities market. Supposedly the trading branch works at arms reach, but they still have access to production information that isn't available to the public... One of my favourite university professors invited him to come and speak after the BP Canada Trading Competition: http://people.ucalgary.ca/~sick http://people.ucalgary.ca/~sick, http://haskayne.ucalgary.ca/bp-canada-trading-competition-details http://haskayne.ucalgary.ca/bp-canada-trading-competition-de...
- Mikeb85 12y ago
  You do know that insider trading rules don't apply to commodities, right? Furthermore, BP produces the commodity they sell... They're going to make money no matter what. But of course they're going to sell for the most they can.
  - bdkoepke 12y ago
    That isn't completely true, there are some insider trading laws that apply to commodities, in the US anyway. That is besides the point though, the fact that it is legal doesn't mean that it isn't insider trading. I was commenting on "And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much." They outperform the market because they have superior market information... And of course I realize that BP is going to sell their own commodity for as much as they can. It is just that there are actually pretty strict rules around how much information the trading branch is allowed to receive from the parent company.
    - Mikeb85 12y ago
      See here: http://www.marylandbusinesslitigationlawyerblog.com/2012/09/insider_trading_in_the_commodi.html http://www.marylandbusinesslitigationlawyerblog.com/2012/09/... And here: http://ccrow.com/newsletters/insider-trading-in-commodities-and-the-eddie-murphy-rule/ http://ccrow.com/newsletters/insider-trading-in-commodities-... And all the rules are available online. Most of the rules pertaining to commodities are to prevent fraud on the part of brokers, and the few that deal with insider trading deal with government employees that have information concerning subsidies, tariffs, environmental regulations, etc... > They outperform the market because they have superior market information... And because of their distribution, economy of scale, storage capacity (so they can wait out the market to get a higher price), refineries, etc... BP has the advantage of being able to extract oil from the tarsands, store it, transport it, and refine it (their largest US refinery has been repurposed to refine oil sands crude), and their traders expedite the sale of it. BTW, I happen to be in the same neck of the woods, and have spoken to BP traders here. Not sure what you're trying to read into, but what they do is legal. 100%. Company information is not considered to be 'insider' information for the purpose of commodities trading. Government regulations matter much more to commodities, as do natural events.

PhantomGremlin 12y ago

> long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors You're probably right. Especially considering how big the fees were. Stevie's firm took 3% of assets for expenses plus 50% of the profits.[1] That's a very high hurdle. The standard hedge fund fee is 2%/20% and even that is high enough that many funds don't beat the S&P (or whatever they're using as a benchmark) after fees and expenses. BTW, Bess Levin at the site I linked to below is great for irreverent and snarky comments about Wall Street. [1] http://dealbreaker.com/2011/02/absurd-speculation-that-sac-capital-might-lower-its-fees-on-account-of-investor-demand-can-be-nipped-in-the-bud-right-now/ http://dealbreaker.com/2011/02/absurd-speculation-that-sac-c...

bdkoepke 12y ago

We had a manager at BP come and present at my University a few years ago on commodity trading. When he as discussing how BP consistently outperformed the market he didn't call it insider trading directly. If I recall his words were "BP leverages our superior market knowledge to outperform the market". In other words they had significant non-public information due to the fact that BP owns a significant amount of the commodities market. Supposedly the trading branch works at arms reach, but they still have access to production information that isn't available to the public... One of my favourite university professors invited him to come and speak after the BP Canada Trading Competition: http://people.ucalgary.ca/~sick http://people.ucalgary.ca/~sick, http://haskayne.ucalgary.ca/bp-canada-trading-competition-details http://haskayne.ucalgary.ca/bp-canada-trading-competition-de...

Mikeb85 12y ago
You do know that insider trading rules don't apply to commodities, right? Furthermore, BP produces the commodity they sell... They're going to make money no matter what. But of course they're going to sell for the most they can.
- bdkoepke 12y ago
  That isn't completely true, there are some insider trading laws that apply to commodities, in the US anyway. That is besides the point though, the fact that it is legal doesn't mean that it isn't insider trading. I was commenting on "And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much." They outperform the market because they have superior market information... And of course I realize that BP is going to sell their own commodity for as much as they can. It is just that there are actually pretty strict rules around how much information the trading branch is allowed to receive from the parent company.
  - Mikeb85 12y ago
    See here: http://www.marylandbusinesslitigationlawyerblog.com/2012/09/insider_trading_in_the_commodi.html http://www.marylandbusinesslitigationlawyerblog.com/2012/09/... And here: http://ccrow.com/newsletters/insider-trading-in-commodities-and-the-eddie-murphy-rule/ http://ccrow.com/newsletters/insider-trading-in-commodities-... And all the rules are available online. Most of the rules pertaining to commodities are to prevent fraud on the part of brokers, and the few that deal with insider trading deal with government employees that have information concerning subsidies, tariffs, environmental regulations, etc... > They outperform the market because they have superior market information... And because of their distribution, economy of scale, storage capacity (so they can wait out the market to get a higher price), refineries, etc... BP has the advantage of being able to extract oil from the tarsands, store it, transport it, and refine it (their largest US refinery has been repurposed to refine oil sands crude), and their traders expedite the sale of it. BTW, I happen to be in the same neck of the woods, and have spoken to BP traders here. Not sure what you're trying to read into, but what they do is legal. 100%. Company information is not considered to be 'insider' information for the purpose of commodities trading. Government regulations matter much more to commodities, as do natural events.