Dr. Stephan Heller, postdoctoral researcher at Harvard Business School and PhD graduate from the University of St. Gallen, presented his paper “Hidden Alpha” at the Inquire Europe Spring Seminar 2025 in Brussels—a study sponsored by Inquire Europe—on the role of hidden social connections in shaping investment outcomes in U.S. equity markets.
Heller opened by highlighting a core challenge in empirical finance: the difficulty of directly observing who knows whom in financial markets. “Most social network studies rely on publicly observable ties—shared education, former employers—when analyzing how information spreads within markets,” he explained. “But in practice, real information often travels through relationships that remain deliberately concealed. Our goal was to uncover them.”
To do so, the study constructs a novel dataset of more than 100,000 Facebook profiles of U.S.-based fund managers and corporate executives, along with their 35 million friendships. By analyzing the visibility of each connection—who chooses to reveal or hide their friends—Heller and his co-authors provide compelling evidence that the decision to conceal friendships is strategic rather than random.
“When fund managers hide their Facebook friends—and those friends include firm officers whose stocks they trade—they realize significantly higher abnormal returns,” Heller noted. “This pattern is further amplified when those firm officers also hide their connection.”
The study categorizes friendship ties into four levels of visibility: Fully Visible, Firm Officer Hides, Fund Manager Hides, and Fully Hidden. Returns increase monotonically with concealment, with Fully Hidden friendships producing the strongest alpha. “We find that fund managers earn an average alpha of 135 basis points per month—or 16% per year—on their most hidden friendships,” Heller stated. “This is not about general stock-picking skill. Their performance on non-connected stocks is statistically indistinguishable from zero.”
To guard against endogeneity concerns, the study conducts an extensive battery of robustness checks—including analysis of connected stocks not held, returns around corporate news, and a placebo test using index funds, which show no performance premium. The analysis also traces portfolio weights, demonstrating that fund managers tilt their holdings toward hiddenly connected stocks. The effect is especially pronounced around material news events.
On the question of who fund managers are most profitably connected to, Heller responded: “We find the strongest performance comes from connections to supervisory and executive directors, and less so from senior managers. The lowest returns come from friendships with heads of investor relations. That’s like being friends with the used car salesman from around the corner,” Heller joked. “They’ll rip you off.”
Importantly, the study finds that the abnormal returns do not reverse, suggesting that hidden connections are not exploiting short-term mispricing. “What we are capturing looks like information that is important for fundamental value and eventually gets incorporated into prices,” Heller explained.
As financial markets continue to integrate ever more alternative data sources, Hidden Alpha highlights that information still flows through people—and sometimes, the most valuable signals may be those we are not meant to see.
View the research in full via : https://www.inquire-europe.org/event/joint-spring-seminar-2024-brussels/