Luxury sports cars brands like Lotus, Porsche, McClaren are beloved by hedge fund executives. But those driving an old beater are likely to be far more successful at generating alpha for their clients, a study shows.
Visitors to Manhattan's Plaza district, Greenwich, Connecticut or London's Mayfair have become accustomed to seeing luxury sports cars tooling around the city – the vehicles are one of the preferred trophy toys for hedge fund managers.
Turns out that luxury sports cars are anything but the powerful symbols for success they seem to be, according to a study co-authored by Singapore Management University.
Hedge funds managed by high-performance car owners tend to take on more risk than other fund managers, wrote Yan Lu of University of Central Florida, Sugata Ray of the University of Florida, and Melvyn Teo of the Lee Kong Chian School of Business.
Risk-Takers
However, they actually do worse for it: «We find that despite taking more investment risk, fund managers who purchase performance cars do not harvest greater returns than do fund managers who eschew those cars,» the study’s authors wrote in «Sensation Seeking, Sports Cars, and Hedge Funds» published this month.
Not only that, but the showy behavior typified by fast cars might be a tipoff of potential fraud, according to the study.
«These results suggest that the sensation-seeking behavior that led hedge fund managers to purchase performance cars might also predispose them to fraud,» the authors wrote.
Keep Off the Golf Course
The study is rooted in the premise that sports cars and aggressive driving go hand in hand, and indicate a thrill-seeking personality. The authors said theirs is the first empirical study analyzing what lifestyle means for investment behaviors.
The authors said the results hold significant meaning for potential hedge fund investors such as pension funds, endowments, and family offices, as well as finance recruiters, consultants, and allocators.
The results are reminiscent of an August study claiming that wealth and asset managers who play golf are more successful – because of the game's role in maintaining social ties. Britain's Financial Conduct Authority sees that differently: earlier this year, the body told U.K. fund managers to keep off the links, warning that fund houses were spending too much money on travel and hospitality for potential clients.
