When Warren Buffett invested in Goldman Sachs Group at the height of the financial crisis, he took a calculated risk that the company would survive the subprime mortgage crisis and avoid the fate of one of its rivals, Lehman Brothers Holdings. Whereas there was substantial risk to the Goldman trade, Buffett saw the opportunity to buy a chunk of the storied investment bank for a bargain price, because at the time few others would touch it. Five years on, Goldman is still here, Buffett’s trade proved to be a winning one, and the Berkshire Hathaway chairman continues to hold one of the longest track records of beating the market.

Most investors, however, fail to beat the market — not because they aren’t as brilliant in assessing investments as Buffett is (which may also be true), but because they fear putting their careers at risk if things don’t work out as they expect. In fact, playing it safe — driven by investors’ fear of putting their careers on the line — may be one of the biggest enemies of alpha, or risk-adjusted returns above a market benchmark.

That’s what State Street Corp.’s Boston-based Center for Applied Research found as part of a larger study about the factors that drive institutional investment decisions. The majority of the 200 investors interviewed — including endowments, foundations, pensions and sovereign wealth funds — say that the largest determinant in their decision-making process is career risk.

Suzanne Duncan, the center’s global head of research, defines career risk as “investment professionals’ fear of losing their jobs, fear of not getting promotions or not being compensated fairly,” but she says it can also include a portfolio manager’s, chief investment officer’s or trustee’s desire to ultimately find a job with a hedge fund or a private equity firm or build relationships with these investors. The professionals might want to hire a certain fund to open new career doors, or they may be late in firing a manager for similar reasons. Duncan emphasizes that investors’ desire to protect their careers is not always a conscious decision. “It’s often an unconscious drive we all have, to protect our situations or improve our situations,” she says. 

The findings are just part of the center’s larger study, called “The Influential Investor,” which also found that investors are adopting alternative investments at a rate that exceeds their ability to understand these investments’ complex risks. They are also part of Duncan’s thinking about why it has become more difficult to find alpha. A joint paper from the Center for Applied Research and the Fletcher School of Law and Diplomacy at Tufts University found that fewer than 1 percent of 2,076 U.S. mutual funds tracked between 1976 and 2006 achieved superior returns after costs. A working paper from the University of Maryland reports that before 1990, 14.4 percent of equity mutual funds delivered alpha, whereas in 2006 only 0.6 percent did so.