Jeffery Rathgeber of Pelorus Advisors highlights on FinAlternatives three simple ways to spot potential insider trading activity at a hedge fund.
He assumes you have access to their detailed returns data as any fund administrator doing due diligence hopefully would.
Even if you won’t be actually using his techniques, they show how easy it is to spot insider trading once someone takes the time to look at your trades.
FinAlternatives: By constructing screens, you’re putting yourself in a position to gain cold comfort that large-scale and repetitive insider trading is not the manager’s core strategy.
1) Big winners in random sectors/assets — Most pros tend to have a certain field of expertise, say energy companies. Use Excel to screen their trades for top gainers. If many of these big trades involve unusual industries outside of the manager’s normal field of expertise, then it could indicate something fishy.
2) Too many trades right before stocks are halted — Screen trades for ‘halted’ stocks in Excel, that is stocks where trading was halted for various important announcements. You can do this using a simple Bloomberg command to generate a yes or no for each stock and download it into Bloomberg (obviously requires access to a terminal). If there are tons of big winners involving trades right before stocks were halted it might signal that the manager knew something they shouldn’t have.
3) Too Perfect Timing — This seems a bit more difficult to do with Excel, but you can also look for big winning trades made right before important news came out for a company. If there is a pattern of excellent timing over and over again it could suggest that the manager is privy to special information.
Perhaps the Securities and Exchange Commission (SEC) should crowd-source insider trader screens. Anyone provided the data could do these basic screens at home. Many would probably be happy and eager to do it for free. We bet a crowd-sourced insider trading hunt, even using the basic screens above, could catch the majority of basic insider trading.