School Ties: Who do you know?

A recent study published by several researchers concludes that mutual fund managers invest more money in the stocks of companies that are run by friends and associates they met in college or graduate school.

These positions also tend to outperform other investments the fund managers make. Is it mere coincidence, or is there something shady going on. Inquiring minds want to know:

The authors of the study offer two possible explanations — one benign and one decidedly not. Fund managers may simply know more about their old classmates, including which ones are likely to make good executives. The alternate explanation is that those executives may be passing along inside information to the fund managers. NYT

These conclusion are based on what the Times author calls investigative economics, a process where researchers comb through data looking for unusual trading patterns to pursue. Hunts similar to these led regulators to pursue option backdating and after-hours mutual fund trading cases.

Scumbags beware. You know who you are. Soon others will too.

But the newfangled tools are not just for regulators to use in the prosecution of lazy white collar crims. Indeed, a new generation of analytics allow analysts to look for an edge that did not exist until recently.

For instance, Wall Street’s rumor mill has been buzzing over a possible Amazon/Netflix merger. I am usually quick to dismiss such banter, but perhaps it is not so far fetched after all.

Amazon.com (AMZN-NASDAQ) and Netflix Inc. (NFLX-NASDAQ) share several relationships, primarily through former employees and board affilliations.  For instance, Leslie Kilgore, a marketing executive at Netflix, performed similar duties at Amazon when employed there.

But there is more to the story...which you can check out here:

Amazon is well-connected into Netflix
NewsVisual

I don’t have a position in either company. But sometimes where there’s smoke, there is fire.

The Small World of Investing: Board Connections and Mutual Fund Returns
NBER Working Paper Series

Quantifying the Role of School Ties in Investing
New York Times (Sub req’d)
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The content contained in this blog represents the opinions of 1440Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned

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