Beware the powerful sports car hedge fund manager

by on December 22, 2016 at 2:07 am in Data Source, Economics, Sports, Travel | Permalink

We find that hedge fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios than do car buyers who eschew performance. In addition, 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. We consider several alternative explanations and conclude that manager revealed preference in the automobile market captures the personality trait of sensation seeking, which in turn drives manager behavior in the investment arena.

That is from a new paper by Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo, and for the pointer I thank the excellent Kevin Lewis.

1 Alex December 22, 2016 at 2:22 am

But does this only apply to those hedge fund managers who must choose between types of car? I would think the interesting cases have several examples of many types..

2 Jeff R December 22, 2016 at 9:45 am

I had the same thought. Who are these hedge fund managers who don’t have multiple cars?

3 Carlos December 22, 2016 at 2:27 am

What about managers that don’t own a car and take the subway to work everyday?

4 dan1111 December 22, 2016 at 6:29 am

I would be quite surprised if many hedge fund managers don’t own a car. Sure, they may not commute to work in it every day…

5 derek December 22, 2016 at 9:59 am

The ones without cars use their helicopter.

6 Dhruv Joshi December 22, 2016 at 3:00 am

I think these rules apply more broadly

I had a theory in my 20s and 30s… if someone owned a luxury car (Merc. , BMW etc) before they owned a house. I would deduct 10-15 IQ points.

Paying someone a lot of money just to enhance your status shows a feeble and impulsive mind

7 S John December 22, 2016 at 9:27 am

Rarely does it make financial sense to own a home if you are or will be a transient in the next 3-5 years, regardless of how much income you earn.

Your point probably still stands to a degree, but the home indicator seems arbitrary and not a terribly great proxy for net worth.

8 JWatts December 22, 2016 at 11:37 am

I doubt it’s meant to be a proxy for net worth. It’s a proxy for emotional maturity.

9 dearieme December 22, 2016 at 4:22 am

The red cars are worst.

10 Andrew M December 22, 2016 at 5:17 am

This sounds like “Where Are the Customers’ Yachts?”, a book written in 1940.

The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers′ yachts were?

11 Tarrou December 22, 2016 at 5:53 am

I wonder how they operationalized that.

12 Tarrou December 22, 2016 at 6:05 am

Oh, here we go: “Therefore, we classify all vehicles with the “coupe two-door”, “convertible two-door”, or “hatchback two-door” body style as sports cars”

These morons classified everything from a G-Wiz to a VW Bug as sports cars. Basically, every small city car in the world is a two door hatchback. The car I drive is a two-door coupe……Honda Accord. Five star safety, bulletproof reliability, front-wheel drive, comfortable seats. Apparently it’s a sports car. Most major car models have a two-door version.

So what we have here is a lot of careful maths about the risk and returns, and the precision of a toddler when it comes to operationalizing their independent variable.

13 dan1111 December 22, 2016 at 6:27 am

Read a couple more sentences, and you’ll find that they address this exact objection by also including horsepower and torque as variables.

Two doors + high power seems like a pretty sensible way to identify sports cars.

14 JWatts December 22, 2016 at 9:20 am

So, pickup trucks are sports cars? (Perhaps, in this case it might work correctly, but it still seems a pretty flawed approach.)

15 dan1111 December 22, 2016 at 9:25 am

Sorry, my comment was an oversimplification. They actually classified based on body type, so only two door cars. Trucks, SUVs, etc. would not count.

16 Thomas December 22, 2016 at 9:46 am

This comment thread was a rollercoaster

17 chuck martel December 22, 2016 at 9:56 am

What about the music they play while driving the car? Are risky hedge fund managers listening to Beyonce’, NPR news or talking on their magic phones? A really good manager is probably riding in a limo, talking on his magic phone to the maintenance manager of the car dealership that’s trying to figure out why his Lotus won’t hit 175 mph.

18 dwb December 22, 2016 at 6:36 am

“We find that hedge fund managers who own powerful sports cars take on more investment risk. ”

News from the Department of Did I Really Need A Paper to Tell Me That.

19 gab December 22, 2016 at 11:38 am

+1

20 Slocum December 22, 2016 at 7:03 am

Better yet is an investment manager who not only drives a modest car but also lives in Omaha. Although since the 2008 crash, the best manager has been the one who drives no car because he does not exist:

http://www.marketwatch.com/story/warren-buffett-is-winning-one-bet-and-losing-another-2016-09-15

21 Abersouth December 22, 2016 at 7:07 am

I’m more interested in a study about motorcycle ownership of hedge fund managers. With subsections explaining nuanced differences of Harley riders, to Adventure riders, to dual-sport, to crotch-rockets, controlling for if they also own a Prius or SUV or god forbid a pickup truck.

22 rayward December 22, 2016 at 8:14 am

Are these powerful sports car enthusiasts male or female? More likely the former. Do females buy powerful sports cars? It’s not the car, it’s the gender. Irony Thursday.

23 dan1111 December 22, 2016 at 8:32 am

This is a good point; gender is not considered in their analysis, which seems a surprising omission.

24 Turkey Vulture December 22, 2016 at 8:54 am

I drive a 2000 Chevrolet Prizm and am open to starting a fund. Please send money.

25 John December 22, 2016 at 9:10 am

Somewhere about 5 years ago I read a similar conclusion regarding cars, but in a different context. It was about dating and female behavior regarding the type of card their suitors drove — and hence type of car you should drive depending on what you’re looking for in your dates. It was a rather unsurprising result, just as this one is: fast cars for fast women not looking for commitments, SUVs for those looking for relationships and possible marriage and family.

26 rayward December 22, 2016 at 9:50 am

Many years ago I worked on a complex transaction in Michigan with a very good and cultured (he played in a symphony part-time) lawyer based in Detroit. What was unusual is that he weighed over 500 pounds. What was even more unusual is that he drove a Corvette. The Corvette had been modified so that the steering wheel was up on the dash, like the steering wheel in a semi. His body occupied the entire cockpit, including part of my (the passenger’s) side. And the car tilted to the driver’s side like a boat. Why would someone of his girth drive a Corvette? Why do many bankers wear (expensive) suits that make them look like Pee-Wee Herman? Why would someone promote abstinence at a time when everyone needs a drink? https://www.bloomberg.com/view/articles/2016-12-22/u-s-economic-ills-are-cultural-too

27 anon December 22, 2016 at 9:58 am

This is of course looking at it the wrong way around .. what are the earnings of the fund managers themselves?

(Either invest with the Honda guy, or be the Porsche guy, but not the other way around.)

28 Tim L December 22, 2016 at 10:36 am

I find this pretty asinine, just like macro, which is just theorycrafting for people who are too lazy to dig deeper.

When I was buying my car, I took out a spreadsheet and was biased towards toyotas for the reliability and slow depreciation like any rational person.

I ended up discovering that certain high end sports cars tend hold value well (although with high maintenance costs) but there are a subset of cars that were effective net nets (worth more in parts) due to cognitive biases of its enthusiasts. I ended up buying a Porsche 996 turbo because of misconceived issues with its engines, which are actually bullet proof and can be tunned up to 1,000 hp. I paid 37k for a 2002 35k mile prestine example and it is now worth about 42-45k and is still appreciating. Including depreciation/appreciation and maintenance costs, my cost of ownership for a 911 turbo was lower than Toyota Camery.

29 Thanatos Savehn December 22, 2016 at 10:45 am

“… exhibit lower R squareds …” In noisy markets the best trend spotters will often if not usually have “lower R squareds” than stock pickers who do their picking by flipping a coin. Casual use of stats lingo, as in that in your link, tends to correlate strongly with sloppy work.

30 Matt December 22, 2016 at 10:50 am

I knew this already. I watched The Family Man last weekend.

/sarcasm

31 JWatts December 22, 2016 at 11:48 am

Is this a proxy for people with young children? How many people without children buy a minivan?

I’d be interested in the same type of study, but with young children (18 or younger). Does the risk go up or downed compared to this study as a benchmark?

32 GoneWithTheWind December 22, 2016 at 4:18 pm

There are old hedge fund managers and there are bold hedge fund managers but there are no old bold hedge fund managers.

33 Hiawatha Jones December 22, 2016 at 6:16 pm

What about long only managers?

34 Jeffrey Ryan Bay January 4, 2017 at 1:20 am

I guess I am safe, my hedge fund manager only travels by private jet, helicopter and limo, and doesn’t even own a car!

Comments on this entry are closed.

Previous post:

Next post: