Hidden Alpha

By: Manuel Amman, Alexander Cochardt, Lauren Cohen and Stephan Heller

Format:Print
| Language:English
| Pages:51

Abstract

This paper documents the central role of hidden connections between fund managers and firm officers in financial markets, drawing on an extensive dataset of over 100 thousand manually identified Facebook profiles and their 35 million Facebook friends. Our findings reveal that the hidden connections between these individuals are associated with the largest and most significant abnormal returns accruing to fund managers, averaging 135 basis points per month (over 16% alpha per year, t-stat = 3.54) across the universe of mutual funds and public firms. In stark contrast, trades involving publicly visible connections generate no significant abnormal returns on average. This premium on hidden connections appears not to be attributable to endogenous selection or familiarity; rather, fund managers exhibit consistent timing ability in knowing when to hold (and when to avoid) stocks of firm officers with whom they share hidden ties. Additionally, the more hidden the connection, the greater the value of the associated trading information. The premium is absent in index funds, where strategic stock selection is not feasible. It is consistent across industries, styles, time periods, and firm types, demonstrating strong and persistent significance to the present day.

Keywords

Returns; Investment Return; Networks

Citation

Amman, Manuel, Alexander Cochardt, Lauren Cohen, and Stephan Heller. "Hidden Alpha." Working Paper, 2024. (Winner of the 2022 Chicago Quantitative Alliance Academic Paper Competition. First Prize presented by Chicago Quantitative Alliance. Winner of the Institute for Quantitative Investment Research (INQUIRE) Grant, 2023.)