Insight or Connection - How Kynikos Associates Profited from the Gaming Bill

The FT has an excellent article about short seller James Chanos predicting and profiting from the gaming bill.

His hedge fund, Kynikos Associates, had put a large slice of its $3bn in assets on a bold punt that shares in the internet gambling sector were about to go into free-fall.

And on October 2, shares in the companies did precisely that as about $5bn was wiped off their value in just a few hours of trading in response to a US Senate decision to introduce tough new laws cracking down on gambling on the web.

It took the industry and the markets, in fact almost everyone except Mr Chanos and his team of traders, by surprise. The consensus view had been that the sector was about to ride higher on a wave of consolidation.

No doubt he has done his research – but so did every other bettor on the gambling bill contract which didn’t go above 20% until after the bill passed. How did he make such an astute bet? Mr. Chanos didn’t comment in the article but FT said, “most analysts think his acute political antenna had come into play. He is widely regarded to be more tuned in to the Washington political scene than most of his peers.”

They say “more tuned in” but I have another idea – it was pure connections, it’s likely he knew information about the bill before it passed. All the research in the world didn’t reveal it to other speculators - so who else knew about Bill Frist’s sneak attack?

One Senator that would have been involved is John Ensign of Nevada. As a Las Vegas based Senator, who has supported protectionism against gambling expansion outside Nevada, he would have a strong incentive to see this bill pass.

His campaign contribution list says it all.

Ensign and Frist had a common interest in the gaming bill and a close relationship besides.

Since it was very likely Ensign had advanced notice that the bill would be pushed throught he would have discussed it with close Las Vegas GOP colleagues – including George Chanos.

Who is George Chanos?

Besides a cousin to hedge fund manager James Chanos who, “considers him a brother,” he is the Las Vegas Attorney General and long time GOP insider – he worked for the Nevada Republican Party for nearly a decade.

George Chanos attended UNLV and worked in student government with Senator Ensign who later endorsed him for his Attorney General position. Chanos and his wife are also campaign contributors to Senator Ensign.

While there is no direct proof - the chain of information and connections are clear. Frist and Ensign knew that the bill would pass. George Chanos found out and passed the information to his cousin James Chanos. James used it to make a massive bet on the sector.

We are not believers in information socialism or “illegal insider trading” but of Occam's Razor. This wasn’t a bold trade based on a research edge – it was a simple information advantage from Chanos connections.

FT called the trade a "million-to-one-chance"; it would be - if your cousin wasn't close with the Senator.