1/6/17

Recently read this interesting article which claims hedge-fund managers with flashy sports cars make for worse investors. The article cites an experiment done a group of researchers from NYU, University of Central Florida, the University of Florida, and Singapore Management University which surveyed 1,144 hedge fund managers, their returns and the cars that they drove.

From their survey, the researchers found that:

Advisors who drive flashy sports cars, since they're likely to be risk-prone, unscrupulous, or both. Conversely, those with a practical, low-thrills car are said to perform better.

Hedge fund managers with sports cars, researchers concluded, took on more investment risk because they have a psychological trait called "sensation seeking" in which they are willing to take on riskier tasks.

Personally, I think this article is bogus. Correlation does not imply causation, just because hedge fund managers with sports cars are more likely to have more volatile portfolio returns does not mean the car they drive is indicative of their risk appetite, it could simply just have to do with car preference.

I am wondering what you guys think of this article and whether or not you think that this is true.

Comments (15)

1/4/17

probably true.

more risk more return, more return more money to the manger, therefore they have more money to spend on a crazy car

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1/5/17

What a shit article

Best Response
1/5/17

The article is shit, the research looks legit.

I got forwarded this three or four times over the past month or so from other quants. (They know me.)

Thought about doing a post on this, but I'm not an OP kind of guy.

Back to my rusty honda (which will unfortunately have to get replaced by a used Lincoln in a year or two-- the bottom is LITERALLY rusting off at 17 years old).

1/5/17

so is the reverse true? are fund managers with rusty cars better investors?

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1/5/17

Kind of. The article says this:

An even more instructive finding comes from the data on the correlation between car type and violations reported to the Securities and Exchange Commission (SEC). According to disclosures that traders are required to file with the government, sports-car owners are 17.3 percent more likely to have committed an SEC violation than are other car owners. On the other extreme, minivan drivers are a full 44.6 percent likelier than the rest to have a clean record. To be glib, fraudsters like roadsters.

1/5/17

I mean isn't this just a corollary of the Berk & Green research on how fund flows impact performance. Larger AUM means more capital spread between more lower conviction ideas --> performance/alpha goes down. The guys driving the Lambos already have huge AUM, so it's just tougher for them to drive alpha.

1/6/17

Good trader needs discipline.
Crazy car is not discipline.

Read it with an Asian accent.

1/6/17

Did they look into managers who have someone else drive them to work?

1/6/17

I don't think there is a more appropriate image for this thread.

1/6/17

1144 pms and only 1774 cars? Theres your problem

1/7/17

What is the performance of HF managers who drive MB E63 AMG wagons? It's the best of all worlds - station wagon + AWD + 600 hp, and faster than a Porsche 911 in 0-60.

1/7/17

of course. I mean, look at Buffett./s

edit: I actually think there might be some truth to it, but of course the reality is a bit weirder, whereas the article speaks to something more typological...

1/7/17

Doesn't matter at all. Basic statistics tell you that you that the data about a sample or population does not tell you jack shit about an individual.

It can tell you trends for the population, but you will NEVER be able to tell with any sort of certainty whether an individual falls in line with the population trends based on the data alone.

Let me hear you say, this shit is bananas, B-A-N-A-N-A-S!

1/7/17

Think about the Value vs. Growth argument. Value is historically proven to out-perform, and would you really want to hire a value manager with a Lamborghini?

Think about it from a consumer perspective. Four types of consumers exist in my eyes.

  1. Frugal thrifter - the type of person who solely shops at Marshall's, T.J. Maxx, even Goodwill from time to time. This person immediately heads to the clearance racks and looks for deals. They aren't brand conscious, and will buy generic or off-brand products. Sometimes they get suckered into buying low quality due to the lower price tag and sometimes they hit home runs finding steal purchases of quality products.
  • This is the Contrarian/Deep Value Investor.
  1. Quality at a reasonable price - This person looks for deals, but they prefer proven brand names. Instead of trying to find deals on the clearance rack of the stuff nobody wants, they look for their favorite brand names when they are on sale.
  • This is the GARP Investor (Growth at a Reasonable Price)
  1. Growth - This person is willing to pay the price to have quality. They want the proven durable American made product and are willing to pay for it as they believe the long life and superiority of the brand will allow them to receive a larger return than the lower quality product.

-Typical Growth Investor

  1. Momentum- This is the person who wants to be the first to have the hottest trend. They don't care what they pay because they seek the thrill of being the first person on the block to have the coolest toy. The product could be absolute dog-shit like Hoverboards (most IPOs), but they still want to have it because they don't want to risk falling behind the crowd. Everyone else has it so why shouldn't I?

Would you really want to invest with a guy who has a consumption style that doesn't mesh with his investment style?

Which of these do you think would be most likely to own a supercar? (Momentum)

Doesn't momentum have a tendency to eventually get burned? (Think bubbles)

At the end of the day investors are humans, and I truly think behavioral finance explains much of investment performance. The riskier consumers are more likely to purchase risky investments. They are also probably more likely to make rash decisions and have less patience. All bad qualities in an investor.

2/4/17
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