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May 12, 2008 01:00 AM

Old school ties can equal better performance

Academic's look at social networking between execs and money managers finds valuable results

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    Andrea Frazzini showed links between social networking and performance.

    Old school ties between corporate chieftains and managers and analysts can provide valuable insight into stock performance, found Andrea Frazzini, assistant professor of finance at the University of Chicago's Graduate School of Business.

    “Social networking is a mostly unexplored area of finance,” Mr. Frazzini said.

    In research with Harvard Business School's Mr. Cohen and Christopher J. Malloy, both assistant professors of finance, Mr. Frazzini said, “We looked at portfolios of U.S. equity mutual funds, where the money managers went to school with CEOs or CFOs or board members of corporations.” The research looked specifically at mutual connections to universities and found the most common tie was Harvard Business School.

    The research found that managers allocate more to stocks of companies where they have old school ties to key executives or board members, than in other stocks in the portfolio, and that these stocks perform better than other stocks in the portfolio, Mr. Frazzini said.

    Reasons for the larger bets and better performance could include better access to information, even an insider trading hypothesis, and “connections lower your cost of gathering information,” Mr. Frazzini said. “A manager might be better at assessing if a person is a good or bad CEO,” when they know each other through school, Mr. Frazzini said.

    In related research, the three professors studied the impact of social networks on analysts' ability to gather superior information about companies where analysts and senior corporate officials attended the same colleges.

    “The typical analyst's recommendations of stocks where he has a school tie tend to perform better” than other stocks recommended, Mr. Frazzini said. He said the strategy could be developed into a trading model.

    Although he said the research found no evidence of insider trading, Securities and Exchange Commission officials asked him last July to present his research on the college-networking connections at a seminar series it hosts. Mr. Frazzini said SEC officials subsequently talked to him about creating screens to watch for such investment activity.

    Boston-based PanAgora Asset Management Inc. recognized Mr. Frazzini's research in 2005 by awarding him the top $2,000 prize in its Crowell Memorial Prize Competition, which honors innovative research in quantitative investment management.

    “Everyone in investment management loves Frazzini's work,” said Owen A. Lamont, portfolio manager at DKR Capital Partners L.P., Stamford, Conn., portfolio manager and fellow at the International Center for Finance at the School of Management of Yale University.

    Mr. Frazzini has been consulting to DKR Fusion Management LP, and its DKR Neutrino Fund LP, a hedge fund. DKR Fusion is mostly owned by DKR Capital Partners.

    In July, Mr. Frazzini will take a one-year academic leave to become a vice president at AQR Capital Management LLC, Greenwich, Conn., ending his relationship with DKR.—Barry B. Burr

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