There is a story about the wealthy businessman who wanted to run for office. He asked a friend if he had any advice.
“Sell the Porsche!”
Clothes may make the man, but fast cars tell us something else altogether. So says a study on hedge fund managers released this week by three researchers.
Driving a flashy high-performance automobile can signal something they call ‘sensation seeking,” which is “not the most comforting behavior when it comes to money management,” according to the paper published this week.
That doesn’t mean that if you like fast cars, you are irresponsible. Microsoft founder Bill Gates, the richest man in the world, said during a recent interview that one of his first splurges was a used Porsche.
Gates said he would take the car out at night and drive fast by himself in order to think through problems at work.
It was almost like therapy.
But Gates was no hedge fund manager.
The researchers take square aim at the hedge fund industry, which had a long string of successful years, but has underperformed the stock and bond markets as a whole for the past three. The result has been massive withdrawals by their investors. Big-name public pension funds from California to New York City are bailing out completely.
As Bloomberg News, which wrote about the study, put it: “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.”
Sugata Ray, professor of finance at the University of Florida, is one of the authors of the study. Ray has studied the personal behavior of many hedge fund managers, including their home purchases, charitable donations, marriages and driving habits.
Ray puts it under the heading of things you should know about the people who are managing your money, or in this case, hedge fund managers.
“My agenda right now is big on what hedge fund managers’ personal lives tell us about their investing,” he said.
“This paper explores one aspect of their personal lives, sensation seeking,” he said. “The trait of sensation seeking has been linked to risky driving, extreme sports, substance abuse and crime. That doesn’t mean everyone who is sensation seeking is a junkie or goes skydiving. It just means there is a correlation between sensation seeking traits and these behaviors.”
In this case, they studied the cars people drive.
“Managers who drive sports cars are likely to be sensation seekers” he said. “In turn, they are likely to more risk in their professional fund management. In terms of practical relevance, if you are investing in a hedge fund with a manager that drives a sports car, you should be cognizant that risks taken by this manager may be higher and there may be operational risks. That being said, not every fund manager who drives a Ferrari or a Lamborghini is going to be taking these high financial risks. But there is a significant correlation between the car they drive and higher risk.”
“It does make sense,” said Washington investor Michael Farr, who drives a “boring,” four-door, BMW sedan. “Investing, when done properly, is remarkably boring. The business is unpredictable enough. It creates thrills both good and bad. There is no place for adrenaline when you are looking after other people’s money.”
Charles Skorina, who runs a Bay Area firm that recruits chief investment officers and Wall Street executives, said “there’s a very similar joke about golf. The better the golf game, the worse the hedge fund manager.”
There is also the axiom that when the founder buys a sports team, sell the stock. Or when the company builds a new headquarters, time to get out.
“A good money manager has to think about the business all the time,” Skorina said.