The demise of Galleon has stirred up press cov­er­age and much dis­cus­sion over what the hedge fund indus­try often calls “edge.“  The basic idea is to find infor­ma­tion that is not known by any­one else in the stock mar­ket.  Then all one needs to do buy and sell the right stocks and make huge prof­its in a short period of time with low risk.  The most dif­fi­cult aspect of get­ting and using this approach is this lit­tle thing called the law gov­ern­ing the use of “inside infor­ma­tion.“ Over the years the use of the term edge has been mixed up with research.  In the old days, before reg­u­la­tion Fair Dis­clo­sure (FD), ana­lysts and large insti­tu­tional funds could get non-public infor­ma­tion directly from com­pany man­age­ments about their busi­ness.  Since that time insti­tu­tional investors and ana­lysts have focused their efforts on find­ing alter­na­tive sources for the infor­ma­tion they want.  These efforts have tended to included the hir­ing of many indus­try con­sul­tants by invest­ment shops and also the cre­ation of many “expert net­work” ser­vices like Ger­son Lehrman and myr­iad small research ser­vices that track every­thing from inven­tory lev­els to boats leav­ing har­bors to slot machine use to cars in park­ing lots. Research can cer­tainly pro­vide dra­matic invest­ment results and so qual­i­fies as “edge” as do things like invest­ment process, risk man­age­ment exper­tise, and so on.  Said another way all these tools cre­ate supe­rior invest­ment per­for­mance.  The prob­lem with the hedge fund indus­try and firms like Galleon is sim­ply greed. Galleon and firms like it want a copy of tomorrow’s news­pa­per head­lines today.  Let’s say we had a con­ver­sa­tion with some­one who actu­ally knew that Apple was going to shift their chip sup­plier strat­egy and go with AMD over Intel.  That would be big news.  No doubt it would move both stocks dra­mat­i­cally in just one day.  The prob­lem with exploit­ing that infor­ma­tion is that it’s ille­gal.  The rules for deter­min­ing insider infor­ma­tion are fairly clear but there are gray areas. What if we were actively research­ing this area and dur­ing an inter­view with a pro­fes­sor of elec­tri­cal engi­neer­ing and noted expert in micro­proces­sor archi­tec­ture we dis­cov­ered what appeared to be a com­pelling argu­ment for Apple to change chip sup­pli­ers in the next two years?  If that pro­fes­sor had no direct con­tact with Apple or the chip sup­pli­ers and was merely describ­ing his informed opin­ion on what he future holds we could use that infor­ma­tion.  Now here is the tricky part.  Let’s say that the idea sounds great and based on other fac­tors like attrac­tive val­u­a­tion we took a posi­tion in the mar­ket based on this shift.  So far, no prob­lem.  Now what if the day after we take the posi­tion Apple makes this announce­ment?  Hmmmm.  Now let’s say that in the course of doing research we also talked with some cur­rent and ex-Apple employ­ees.  Even if they told us absolutely noth­ing about any plans Apple had the cir­cum­stances seem pretty sus­pi­cious.  Maybe we were just lucky, maybe we knew some­thing.  (As an aside secu­rity law works more like “guilty until proven inno­cent” so just because some­one didn’t do any­thing wrong isn’t good enough to escape pros­e­cu­tion.) Com­ing back to the basics if one works very hard in devel­op­ing edge than it’s prob­a­bly going to be fine.  Research pro­vides “edge” because it trans­lates into bet­ter fore­casts on future prod­uct cycles, rev­enue growth and mar­gins which tie directly into expec­ta­tions and the cur­rent stock price.  By hav­ing a defined process for this and prac­tic­ing it con­sis­tently there is abun­dant edge avail­able with­out ever hav­ing to push the enve­lope of legal­ity in a search for quick and risk-free prof­its. As an aspir­ing ana­lyst one of the most crit­i­cal assets is your integrity and pro­fes­sional con­duct. If you encounter insti­tu­tions who approach the busi­ness look­ing for non-public infor­ma­tion or lead every dis­cus­sion with “tell me some­thing I don’t know” they are not worth the invest­ment of your own time and resources.   High qual­ity insti­tu­tions do their own work and use research firms and ana­lysts to help them get a supe­rior under­stand­ing of indus­try dynam­ics, com­pany fun­da­men­tals, investor expec­ta­tions and val­u­a­tion gaps that they can exploit.  It’s good old-fashioned elbow grease applied with a honed exper­tise that takes years or even decades to develop.