Powerful Sports Cars
Fade the fund manager with the brand-new Maserati, put your faith in the one who just bought a Honda Odyssey.
"We find that hedge fund managers who own powerful sports cars take on more investment risk, " wrote Yan Lu of the University of Central Florida, Sugata Ray of the University of Florida and Melvyn Teo of the Singapore Management University. "The incremental risk taking by performance car buyers does not translate to higher returns."
Lu, Ray and Tao are not out to obsess over the makes and models of various fund managers' rides. Rather, their principal point is about how the emotional makeup of those making investment decisions could impact outcomes.
"We argue that the purchase of a powerful sports car, more often than not, conveys the intent to drive in a spirited fashion and therefore signals an inclination for sensation seeking, " they wrote, going on to show that these "sensation seekers" deliver strikingly more volatile returns, that are not more favorable in a risk-adjusted framework.
Interestingly, the converse is also true: Drivers of minivans tend to deliver less volatile returns, the authors found.
Bolstering their point, the authors further found that drivers of sports cars are more likely to terminate their funds and to report regulatory and criminal violations than the average fund manager — while drivers of "practical but unexciting cars" are less likely to do so.
The authors say that other factors such as fund age or the wealth level of the managers are not likely to explain the disparate results.