Alpha by Affiliation

Abstract

Using proprietary data to identify employment-connected hedge fund families, we find highly coordinated trades within families predict abnormal returns over the next three months. Results are robust to controlling for other trades within the family, hedge fund industry crowding and herding, and geographic proximity. Effects are pronounced within smaller networks and over short (long) horizons among larger (small) capitalization stocks, suggesting that hedge fund families face arbitrage frictions among the most mispriced stocks. Overall, findings confirm social networks of fund managers remain a distinct channel for information diffusion into stock prices.

Keywords: Crowdedness, Hedge Funds, Herding, Information Diffusion, Networks, Stock Return Predictability

JEL Classification: G11, G12, G14, G23, G40