Hidden Alpha

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.

In oher words, rhe old adage "it's not what you know, it's who you know" still holds true.