[oliveoil]

One day, mathematicians will prove that any fund doing better enough than the index must be insider trading. All those people from the 90s and 2000s, long retired by then, will be convicted. It's like in cycling when they measure too much hemoglobin in the blood they conclude the guy's doping. The funds' financial records will be their frozen piss samples.

[RockyMcNuts]

Seems like saying one day mathematicians will prove any poker player who won the World Series of Poker must have been cheating.

I'm sure people like Warren Buffett, and John Paulson and the numerous others who predicted the financial crisis, are not too worried about that.

In any case the Chicago efficient market mafia proved it years ago, based on their assumptions about how the market works. Proving something with a model doesn't make it true in the real world. Even in physics you have to do the experiment to show the model matches reality. Of course, in finance and economics, it's usually quite difficult to do a repeatable experiment.

[iwwr]

There is information other than insiders get which can be used as an advantage. A person more knowledgeable about a field of activity may be better at spotting trends in that field. Also, someone like Warren Buffet who actually steps foot on the ground may get overall better information about companies.

But more profoundly, the markets are not really suited for retail customers. These people are drawn in by the promise (often lie) that investing is easy and it is possible to make a hobby out of it. What happens is these amateurs are losing money, which are gained by the real professionals.

Rules against insider trading are directed at making the markets a fairer place and especially so for the retail customers. In reality, these rules create the illusion that it's possible to make it as an amateur with little money and no connections. As we've seen, the promise is often illusory.

[netcan]

I wonder what the markets would look like if insider trading ceased being thought of as a crime. You just expected to make your decisions knowing that others out there may have better/different information.

Would this completely destabilize markets or would it find some new stability as people got used to it.

[mdda]

The 'first order' effect of insider trading is that some well-informed people can make profits at the expense of those who know less : But the flip-side is that price-discovery happens quicker.

The more insidious effect is that liquidity goes down (transaction costs are higher for everyone), since one always has to be wary that the person selling to you knows more than you do.

From an economics point of view, regulating (or not regulating) insider trading are both valid options. But the liquidity argument is the swing vote.

[netcan]

I don't find that transaction costs / liquidity story very convincing. Buying from someone who knows something is no more damaging than buying from someone who doesn't if its the same stock at the same time.

[mdda]

Suppose someone is selling you a house. They're desperate to sell : are you saying it makes no difference whether they're selling because their aunt just died (i.e. random sale) or they're someone within the town planning department?

Or suppose it's a car mechanic that wants to unload a car cheaply?

[nekitamo]

Or those same mathematicians could simply beat the market and become filthy rich. Oh wait, they already have: http://en.wikipedia.org/wiki/Renaissance_Technologies

[ig1]

Even by pure chance some funds are going to outperform index trackers, it's basic monkey & typewriter statistics.

[shii]

Hasn't Theil's Clarium Capital beat the market simply by making large calculated bets against the grain which turned out right? Why would that be considered insider trading? In cases where large traded just before a big move occurs, there's significant possibility for insider trading. But I don't think you can blanket statement all such wins against the market as insider trading. Maybe over a longer period of time, this would appear suspicious.

[jakarta]

Peter Thiel is largely regarded as a failure of a hedge fund manager. For a while he had a good record but he did the decoupling/long oil trade which blew up in 2008.

His fund had a bunch of redemptions and is now mostly his own money.

[sorbus]

Or very lucky. Or good at spotting trends. Or going out of their way to notice patterns indicative of insider trading on the part of other funds. Insider trading is not the only way to do better than the index.

[xtreegold]

Depends on the timeframe. If you consistently get lucky, you most likely weren't.

[oliveoil]

But I said 'better enough'. There are of course investors that can legally get above the index.

[daniel-cussen]

>The funds' financial records will be their frozen piss samples.

A little surprised you were downvoted. Here's a "frase para el bronze" (phrase that will be set in bronze, repeated possibly forever).

[xtreegold]

"bronze" in spanish is spelled "bronce". Phrases to be set in bronze refer to phrases scuplted in statues or other commemorative decor.

[daniel-cussen]

Whoops.