When Your Hedge Fund Manager Buys a Ferrari, Find a New ManagerBy
Study shows link between sport car owners, volatile returns
Funds more likely to terminate, report fraud, paper finds
Maybe David Einhorn was on to something when he bought his Honda Odyssey.
It turns out that the car your hedge fund manager drives says something about his capacity for risk taking -- and his ability to generate market-beating returns. Minivan owners in particular run funds that tend to take on far less risk and exhibit lower volatility than sports-car driving managers, according to a new study by academics Yan Lu, Sugata Ray and Melvyn Teo.
The researchers say car ownership can be a good gauge of a trait they call “sensation seeking,” which has been linked to substance abuse and crime -- not the most comforting behavior when it comes to money management. They found that the increased proclivity for risk taking comes “without being compensated for higher returns.”
In one example, risk-adjusted returns suffered more than 21 percent for the sports car owner versus the average fund. Put another way, the average hedge fund with a hot-rod driver at the helm is more than 16 percent more volatile than those with a manager who drives a more “practical” car.
The results stand up when controlled for other factors like age or share restrictions, the researchers say. What’s more the manager car preference signifies more than just likely fund performance. It’s also a harbinger of more dire outcomes.
“Performance car owners are more likely to terminate their funds, engage in fraudulent behavior, load up on non-index stocks, exhibit lower R-squareds with respect to systematic factors, and succumb to overconfidence,” the trio wrote.