Hedge FundsSep 8 2021

What can hobbies tell us about fund managers?

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What can hobbies tell us about fund managers?
Photo by Javon Swaby from Pexels

A great deal of blood, ink and sweat, as well as cash, has been spilt trying to identify that mystical group of people: the brilliant, consistent, alpha-generating stock-pickers.

All sorts of odd ideas have been generated as to their special characteristics and unusual markers of success.

The latest is that their choice of recreational activities can help to identify them. As a result, there have been reports, based on real evidence, which suggest that golf-playing and fast car ownership is a powerful, but unobtrusive, measure of an investment manager’s skill and talent. Curious explanations have been offered for why that is the case.

One idea came from three academics* at a business school in central Florida. They found, as expected, that hedge fund managers who do well in competitive, large cash-prize poker tournaments have significantly better fund performance. They had higher average returns compared to a control group (4.2 per cent vs 2.8 per cent). 

Poker star

There were also other findings. For example, after a manager won a publicly announced poker tournament, net flows to their fund increased significantly. 

However, fund alpha decreased significantly, suggesting decreasing returns to scale erode the informativeness of the poker win signal. They concluded that hedge fund investors would be better off investing in an otherwise similar manager without poker tournament success.

Of course, there were caveats and concerns with confounding and uncontrolled factors in the study. Bloomberg picked this up and concluded that the major takeaway is that we need better research and more information on the characteristics of top decision-makers, particularly the illusive decision/rainmakers in the financial industries.

But what do we know about the psychology of leisure pursuits and recreational preferences? If we knew exactly and truthfully how people choose to spend their leisure time, what insight would we get into the abilities, needs, talents and preferences of that individual?

What would you conclude if your stock-picker was a bridge champion or a sky-diver? A serious art collector or an amateur actor? A gardener or a keen pilot? A writer of detective novels or a fanatical weight-lifter? And what if they admitted that the demands of the job leave them no time or energy for any serious leisure activity?

Hobbies tell a story about the person

Some hobbies require a lot of money, others very particular talents. But maybe because they are freely chosen and often pursued with so much intensity and passion they are really the royal road to uncovering the true person. Find out what people do outside work and you get a real handle on them.

Academia has had something to say on this issue, as one may expect.