Hedge Fund Managers Are Getting Inside Information From Alumni Networks, Study Finds

Research shows hedge funds have a trading edge following university alumni “mixers.”

Illustration by II

Illustration by II

Hedge fund managers are gathering private information from their alumni networks and using that trading edge ahead of merger announcements, a study found.

Managers of hedge funds who are connected to directors of companies engaged in mergers increase their call option holdings on targets before the deals are announced, according to a paper from the Energy Market Authority’s Harvey Cheong, University of Hawaii professors Joon Ho Kim and Harold Spilker, and professor Florian Münkel from Canada’s Saint Mary’s University. An increased holding of bullish options to buy a company’s shares at a set price stands to be highly profitable, as merger announcements tend to prompt a rise in the target’s stock.

The researchers noted that many universities organize “mixers” to celebrate milestone graduation years, with alumni coming together at the same event to celebrate their 5th, 10th, 15th, and 20th reunions. This gives invitees across class years an opportunity to mingle and develop relationships — including hedge fund managers and directors of companies.

“Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information,” the researchers found. “Among institutional investors, hedge funds invest with the fewest trading restrictions and have the highest monetary incentives to pursue excess returns from gaining informational advantages.”

[II Deep Dive: As Robinhood Investors Pounced, Hedge Funds Bailed]

The study analyzed firms in the Barclay’s hedge fund database from 2007 through 2015 and collected their quarterly option holdings from regulatory filings, according to the paper. The researchers identified school ties between hedge fund managers and company board members through the Barclays database, BoardEx, individuals, and university reunion programs.


“Alumni reunion networks play an important role in conveying insider information to outside financial market participants,” they said. “We find the strongest reunion effect on information dissemination when merger events occur immediately after reunions.”

Hedge fund managers connected to directors of companies targeted for mergers more than doubled their options holding during the quarter immediately preceding the deal announcement, according to the paper. The authors calculated a 118 percent jump from their mean holding.

“Informed traders prefer using options to exploit information advantages,” the researchers said.