15/12/2016
Avoid hedge fund managers in splashy sports cars
Tell me what kind of car your hedge fund manager drives, and I will tell you what propensity they have to take risks and beat the market.Hedge fund managers who own fast sports cars take more risks in their investments than those who don’t have such cars, a new university study by Yan Lu, Sugata Ray and Melvyn Teo finds. However, this higher level of risk does not result in higher returns. As a result, they have weaker Sharpe ratios than managers who do not own sports cars.Sports car drivers earn returns which are 1.8 percentage points more volatile on an annual basis than those who do not drive sports cars. This is a 61.16% increase in volatility compared with those who do not drive sports cars.The opposite is also true. Managers who have “practical but less exciting” cars take fewer risks than those who do not have such cars. Specifically, minivan owners earn returns which are less volatile by 1.28 percentage points compared with other car owners.The study also finds that owners of sports cars are more likely to close their funds, behave in fraudulent ways, accumulate shares from outside indices, and to show excessive confidence.After considering several possible explanations for this finding, the authors of the study conclude that the preference of managers for a particular vehicle is an indicator of a personality trait representing a desire for a sensation, which is also a contributing factor to the behaviour of the manager in the investment field.Lu, Ray and Teo had already become known for a study two years ago of the impact of divorces and marriages on the performance of hedge fund managers.
