Sports Cars, Psychopaths, and Testosterone: Inside the New Frontier of Fund Manager Research
We would like to believe a lot of investing success can be attributed to behavioural aspects or psychology than subject matter expertise. Now there is a whole body of research emerging taking this to the next level in terms of assessment of the fund manager’s personality traits as a key input to manager selection, according to this piece in The Institutional Investor. The piece ends with this quote from a pension fund manager about what all he considers while selecting fund managers “It may seem silly,” he says. “But in my experience, yes, if there’s a lot of red Ferraris in the parking lot — particularly if they’re leaving by 3 in the afternoon — it’s time to get off the bus.” Like he says, it might seem too simplistic but one gets the drift. Indeed, we at Marcellus incorporate this line of thinking whilst assessing promoters (or CEOs) of the companies we would like to invest in. My colleague Saurabh Mukherjea has written extensively on the behavioural aspect of investing – whether in the context of capital allocation by a CEO or a business owner or a fund manager or indeed our clients when they invest with us. You can read two of those pieces here and here. As fund manager evaluation in future will likely incorporate such behavioural aspects, we at Marcellus look forward to undergoing a slew of psychometric tests from our prospective clients.
“Should investors care about a fund manager’s relationship status? What kind of car they drive? Ask them if they’ve won any poker games lately? Research points to yes. A recent outpouring of academic papers links the investment performance of professional fund managers to their characteristics as individuals — how they grew up, their personality traits, even their testosterone levels. Studies have explored the impact of everything from where investors went to school to whether they lost a parent in childhood. The studies have attracted widespread attention from financial and mainstream media outlets — Institutional Investor included. You’ve probably seen the headlines: “A Hedge Fund Manager Who Drives a Ferrari Will Probably Underperform.” “‘Psychopath’ Hedge Fund Managers Make Less Money Than Nice Guys.” “Why ‘Alpha Males’ Make Bad Hedge Fund Managers.” The list goes on.
….One such paper arose after a hedge fund of funds sought to quantify the relationship between personality traits and performance. The firm, San Francisco-based TeamCo Advisers, approached psychology professor Dacher Keltner and psychology PhD Leanne ten Brinke, now an assistant professor at the University of Denver.
Ten Brinke remembers having “no idea what a hedge fund was.” Her prior research had focused on the psychopathic tendencies of criminals. At that time, she was conducting personality assessments and using nonverbal cues to identify psychopathic and other personality traits. TeamCo Advisers wanted to take that skill set and apply it to hedge fund manager selection. “They were interested in if you could find a personality trait that led to greater returns,” says ten Brinke. “But they were particularly interested in avoiding blowups — Bernie Madoff types who are just ripping people off.”
The resulting collaboration was a study focused on what psychologists refer to as the dark triad: narcissism, Machiavellianism, and psychopathy. By analyzing videotaped interviews of 101 hedge fund managers, ten Brinke and Keltner spotted these traits and examined whether there was any distinguishable link to investment performance.
The results were definitive: Hedge fund managers who most exhibited the dark triad characteristics trailed the overall group by almost a full percentage point each year in investment returns annualized from 2005 to 2015. When their performance was adjusted for risk, the gap grew even wider.”