A Hedge Fund Manager Who Drives a Ferrari Will Probably Underperform
Hedge fund managers who own sports cars take more risk and deliver less alpha compared to owners of more “practical” vehicles, research shows.
Seeking a high-performing hedge fund manager? Try hiring one who drives a minivan.
In a perhaps unsurprising new study, university researchers found that hedge fund managers who own sports cars make riskier investments, while minivan owners were found to be more cautious investors. The paper, which is forthcoming in the Journal of Finance, was based on public records for vehicle purchases, which the authors used to identify cars owned by 1,144 U.S.-based hedge fund managers.
Although higher risk can sometimes lead to higher returns, the additional risks taken by sports car drivers “ultimately hurt their investors,” authors Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo, who are all finance professors, wrote in the paper. They found that sports car owners delivered lower Sharpe ratios and alphas, and traded “more frequently, actively, and unconventionally.”
Overall, they underperformed hedge fund managers without sports cars by 2.92 percent per year.
“We argue that the purchase of a powerful sports car signals the intent to drive in a spirited fashion and therefore conveys a propensity for sensation seeking,” the authors wrote. Brown is a professor at New York University, while Lu works at the University of Central Florida, Ray at the University of Alabama, and Teo at the Singapore Management University.
They found that minivan drivers, meanwhile, outperformed non-minivan drivers by 3.22 percent per year.
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Beyond underperforming owners of “practical but unexciting cars,” sports car purchasers were also more likely to terminate their funds and disclose regulatory actions or even criminal violations. The results of the study further suggested that these “sensation-seeking” hedge fund managers could be more predisposed to fraud.
“The disinhibition and boredom-aversion of sensation seekers imply that they cut corners on compliance and record-keeping functions, leading to higher operational risk, which hurts their clients,” the authors wrote.
Hedge fund investors, for their part, seem to “correctly perceive sensation-seeking managers to be less competent,” at least based on fund flows. According to the study, sports car owners manage an average of $515 million, $303 million less than the average hedge fund manager without a sports car.
Meanwhile, minivan drivers managed about $1.95 billion on average – $1.22 billion more than those without minivans. Still, Brown, Lu, Ray, and Teo argued that the difference in assets under management should be still higher given how much minivan drivers outperformed.
“These findings suggest that investors do not fully appreciate the superior investment skills of sensation-avoiding managers,” the authors concluded.