Research Paper: Identification of Potential COVID-Related Insider Trading by US Senators Based on Financial Disclosures
First off, a couple of news items before jumping into the meat of this update.
Our EASE paper has made quite a few Top 10 lists on SSRN! That’s pretty cool. They’re no longer up on the lists due to being past the 60-day limit, but we were up on the following:
ERN: Asset Price Forecasts
ERN: Econometric Studies of Corporate Governance
ERN: Firm
ERN: Firms Temporal Investment & Financing Behavior
ERN: Index Numbers & Aggregation
Econometric Modeling: Capital Markets - Forecasting eJournal
Microeconomics: Intertemporal Firm Choice & Growth, Investment, Financing, & Capacity eJournal
Political Economy: Fiscal Policies & Behavior of Economic Agents eJournal
Speaking of EASE, the fund based on EASE, Near-term Returns on Corporate Heuristics (NRCH), is crushing it in paper trading. Since going live in July, it has a return of nearly 50%. Oh yeah, we’re going to get it into a track record as soon as possible.
Novatero is exploring the idea of putting GAIA and NRCH into public indexes so that y’all and the general public can keep tabs on strategy performance while we build out our track records. I’ll be sitting down and pursuing this in-earnest in the coming weeks, but if you work for or know of companies that provide indexing services, please don’t hesitate to reach out!
Our latest research paper is out, and is a bit of a departure from our previous two SSRN works. The idea for the paper was originally borne out of a potential fund strategy during a particularly fruitful brainstorming session (we’re currently testing and are R&Ding a couple other ideas from that bounty). Originally, I was aiming to use financial disclosure data from members of the United States Congress (both the House of Representatives and the Senate) and look for alpha in either an overall combination of performance by Congress or a potential long-short strategy via quantiles of members. I thought I was being super clever and delving into a corner of the market that no one else had considered…until I saw a couple of reddit posts by Quiver Quantitative about their data dashboards for both Congressional bodies. Dang. Still, I was impressed by their data wrangling and their construction of virtual portfolios for each Congressperson based on their public disclosures. While not a true representation of their portfolios, the virtual portfolio could show the impact of public trades on their portfolio relative to the US market (in this case represented by the S&P 500). Senators and Representatives that divested at the beginning of their service would be virtually shorting the market, making their virtual portfolios underperform the US market in good times and outperform in bad times. Did this mean that members of Congress were losing money by divesting? Not at all: financial disclosures only apply to single company stocks, options, and some other investment vehicles, but they don’t apply to ETFs, mutual funds, and various other long-term buy-and-hold investment vehicles. Chances are strong that this divested capital was put into various index-following vehicles, allowing them to perform at a market benchmark.
The interesting cases came up with those who chose to continue to make transactions during their terms. Congress has both a lot of access to information that the general public doesn’t, as well as the power to potentially affect public companies as well as investment vehicles. The STOCK Act of 2012 does a good job of setting fences around what can and cannot be done with nonpublic information, but only if the law is enforced. Around the nadir of the COVID recession, four Senators were mentioned as potential violators of the STOCK Act regarding stock transactions they made around the time of a private Senate-only briefing on COVID-19 back in late January. Ultimately, only Senator Burr saw a deeper probe into his activity, while the other three senators (Feinstein, Inhofe, and Loeffler) were left alone. Curious about this and having access to the transaction data, we decided to take a look into it ourselves.
Our analysis was three-fold: look at alterations in transactional volume, significant changes in strategy relative to the US market, and a market timing advantage relative to two baselines. The first two analyses are fairly topline: was there a significant increase in transactions around the COVID briefing, and was there a significant deviation in their strategy’s correlation to the US market post-briefing? The final analysis was a deeper dive, using virtual portfolios to determine if the transactions made by senators saw a significant, successful deviaition from the US market and/or the rest of their peers. None of these analyses in-of themselves is a clear signal, but a combination of two or all three lends credence to insider trading having occurred. At the end, the results point to three senators that show signs of insider trading off of the nonpublic COVID-19 briefing: Senators Richard Burr, Kelly Loeffler, and David Perdue. Interestingly, each of the three senators used the information differently: Burr used it like a blunt instrument and blatantly exited all of his positions in a panic. Perdue was much more subtle, balancing his strategy to sell off companies that would fall with the market while buying into companies that would profit in a pandemic-based recession. This gave his transaction volume and correlation to the market the look of holding constant on the surface, while disguising the undertow of capitalizing on insider trading. Loeffler used the information to establish a risk mitigation strategy: selling off of assets but placing a variety of options to hedge her positions in case the market never dropped or recovered quickly. Unfortunately, the information available on option in the disclosure data is limited, so we don’t know the true effect of this hedge on her virtual portfolio.
These results are disheartening and frustrating: in the midst of the greatest global pandemic in a century, these senators chose to think about themselves instead of their constituents. Representative government only works if those elected truly represent the wishes of those whom they serve, and actions such as these fly in the face of their oath of office. We should hold our elected representatives not to a lower standard relative to the general public, but to a higher one. As someone with a healthcare worker for a spouse, the failure of our government to pass anything from a second stimulus to a comprehensive federal plan-of-attack to stem the dwindling supply of ICU beds and ease the burden on an over-worked, over-tired, and burnt-out healthcare industry is infuriating at best and complicit criminal negligence at worse. I can’t do much in fixing this crisis as a quant, but hopefully the work done here and elsewhere will get the concept of serving the people through the collective thick skull of Congress, or at the very least push for an update to the STOCK Act that requires full divestment from elected members of Congress.
Feel free to reach out to us if there’s any questions or comments you have on the paper. We’re more than happy to address them.