In September of this year, a curious story started making the rounds on my Facebook feed. It seems that the CDC had underestimated the rate of cat scratch disease among the general population, determining that it was both more common and perhaps more severe than previously thought.
Folks in my feed freaked. The EFF. Out.
It can’t be! Little Fluffy how could you?!?
People on Facebook (and some media outlets) actually started asking questions like:
“Are you still willing to own a cat??”
“What about kittens? You can’t get a kitten now! They are even more prone to spreading the disease!”
“What if you have kids? Children 5-9 are most susceptible!”
Folks took special care to ensure the story hit my feed. As a crazy cat lady, they wanted me to both forewarned and forearmed.
And my reaction? After I got done singing “They give me Cat. Scratch. FEVER!” in my best Ted Nugent-esque voice, I laughed my cat-fur dusted butt off.
I’m guessing no one really made it past the headline of the article to see that the actual chance in contracting cat scratch disease was 5 in 100,000. That’s right, you have a better chance of injuring yourself in a “toilet related incident” (1 in 10,000) than you do of contracting cat scratch FEVER. Buckets and pails injured 11,000 people in 1996 (about the same number of folks that get cat scratch FEVER annually). Hell, air fresheners caused 2,600 injuries one year.
Y’all have seen the Darwin Awards - you know just about anything can be dangerous in the wrong hands.
But no, because people are well on their way to black belt status when it comes to specious claims and spurious correlations, somehow deadly kittens were news.
I had almost the same reaction (minus the Ted Nugent rocker style) two weeks ago when I came across the Bloomberg article “Hedge Fund Woes After U.S. Crackdown Don’t Surprise SEC’s Chair.” In it, the author notes that hedge fund returns have “fallen off a cliff “ since regulators and prosecutors cracked down on insider trading. Mary Jo White was quoted as saying “I don’t think anyone would argue that some of those returns at some hedge funds, and I don’t want to paint with too broad a brush, can be attributable to obviously trading on insider information that one is not allowed to trade on.”
The article then goes on to compare HFRI Equity Hedge returns to the S&P 500 November 2002-September 2009 and November 2009 to September 2016. Not sure what happened to October 2009, but whatevs.
Oh my. Where to even start?
I suppose the start of the SEC insider-trading crackdown could be traced to the charges filed against Raj Rajaratnam of Galleon in October 2009, which would account for the rather odd time period selection in the article.
However, information on insider trading enforcement actions seems to indicate that the number of actions was largely stable until 2015, hovering right around an average of 51, until a spike to 87 enforcement actions occurred in 2015.
I suppose you could say that high-profile hedge fund enforcement actions from 2009 on acted as a deterrent industry-wide. One could argue that fear of insider trading actually curtailed insider trading. All the compliance training, videos, quarterly disclosures, CCO reviews and whatnot that were instigated in the wake of SEC activities kept hedge fund managers too honest to continue their pernicious investment activities post-Raj's 2009 arrest.
Although, to be fair, compliance is generally designed to catch honest people. Money managers' who genuinely want to rip you off? They'll find a way to do so, compliance or not.
But regardless, I might argue that any crackdown that has occurred happened not in 2009, but in 2015 (a 70% increase in insider trading enforcement actions from the prior 10-year average is definitely notable), when, let’s remember, the S&P 500 lost 0.7% (without dividends reinvested) or gained a whopping 1.2% (with dividends reinvested), depending on your point of view. During the same period, the HFRI Fund Weighted Composite lost 0.85% (net), which makes performance during the actual crackdown time period a virtual tie, no?
Furthermore, HFR reported that 55% of funds posted gains that year. So maybe up to 5,500 funds were still engaging in insider trading, despite the crackdown and widespread compliance terror? Oh, and the funds listed in this Bloomberg article (http://www.bloomberg.com/news/articles/2016-02-23/the-top-performing-hedge-funds-of-2015), well I guess they were all tripping with the tipsters, too?
That’s a LOT of alleged (implied?) insider trading, my friends. A lot more than the actual 87 insider trading enforcement actions that took place that year. I guess all 87 of those enforcement actions must have been hedge funds, right?
According to an SEC publication on 2015 activities, “notable” examples of insider trading were listed as follows:
- An entrepreneur, a private equity investor and a venture capital general partner (walk into a bar?) investing in Cooper Tire;
- A former Fortune 500 exec and his brother-in-law;
- A former day trader, two of his friends and his brother-in-law (note to self, don’t talk freely in front of married-in family); and
- A Swiss trader
Were some hedge funds personnel charged with insider trading that year? I’m sure there were – there are some hedge fund personnel charged virtually every year. However, the fact is that the folks that get socked with insider trading come from all walks of financial and non-financial life. And even if EVERY case in FY2015 was a hedgie – it would still comprise less than 0.01% of the overall industry.
That’s right, a toilet injury is STILL more likely than hedge fund insider trading resulting in an enforcement action.
So if I’ve said it once, I’ve said it 1,000 times, but clearly it still bears repeating.
First, average not all hedge fund returns have lagged the S&P 500 in recent years. Some funds have done worse, some funds have performed well, and some have generated genuinely strong returns. Second, time periods matter. Third, the S&P 500 has been in a near-historic run-up and IS NOT HEDGED so it has no performance drag. Fourth, allegations of insider trading and hedge funds tend to be grossly exaggerated. And finally fifth – you’re pretty unlikely to get cat scratch FEVER from a sweet kitten – so visit your local shelter today.