Publications
Publications
- 2022
Hidden Alpha
By: Lauren Cohen, Manuel Amman, Alexander Cochardt and Stephan Heller
Abstract
Using the setting of financial agents, we explore the importance of hidden connections relative
to all other network connections. We find that hidden connections are those associated with
the largest and most significant abnormal returns accruing to fund managers—on average
135 basis points per month (over 16% alpha per year, t-stat = 3.54) across the universe of
mutual funds and public firms. This is relative to insignificant abnormal returns accruing
on average to all other trades, including those to trades of “visible” connections. The hidden
connection premium does not appear to be driven by endogenous selection or familiarity, as
fund managers seem to be correctly timing when to hold (and when to avoid) the firm officers
to whom they are tied. Further, the more hidden the connection is, the more valuable the
information that appears to be associated with the trading across it. This hidden connection
premium exists across industries, styles, time periods, and firm types; remaining strong and
significant through the present day. More broadly, our findings highlight the importance of
missing nodes and hidden edges when attempting to understand the true nature of shock
propagation in complex network systems.
Keywords
Citation
Cohen, Lauren, Manuel Amman, Alexander Cochardt, and Stephan Heller. "Hidden Alpha." Working Paper, 2022.