jQuery in external file not working
If you are getting alert from the JS file than it means your JS file is loading properly, and the problem of hide seems to be causing because hide to be called in the document.ready as following:

// Jquery wrapper for drupal to avoid conflicts between libraries.
(function ($) {
  // Jquery onload function.
  $(document).ready(function() {
    $(".image-overlay").hide();
  });
})(jQuery);