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What Kind of Car Does Your Fund Manager Drive?

Posted on December 14, 2016 by Doug Cornelius
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In a new paper, researchers found that hedge fund managers who own powerful sports cars take on more investment risk and are more likely to engage in fraudulent behavior. The inverse is also true: Drivers of minivans tend to deliver less volatile returns, according to the study.

“Specifically, sports car drivers deliver returns that are 1.80 percentage points per annum more volatile than do non-sports car drivers. This represents a 16.61 percent increase in volatility over that of drivers who shun sports cars. Similarly, drivers of high horsepower and high torque automobiles exhibit 1.14 and 1.25 percentage points per annum more volatility, respectively, in the funds that they manage than do drivers of low horsepower and low torque automobiles.”

The researchers used four sets of hedge fund databases from 1994 to 2012 that included 58,068 hedge funds, of which 33,680 are still in existence. Then they tapped into vehicle purchase databases to try to match fund managers to their cars. Thye ended up with a set of 1774 vehicles to 1,144 hedge managers. Of those, they identified 163 sports cars and 101 minivans.

I’m a bit skeptical of the studies methodology at this point given how they have narrowed down the set to be studied.

But I continued on to the operational, and complaince aspects.

The study found that sports car drivers are 17.3% more likely to have a violation report on their Form ADV than the owners of other cars. Minivan owners are 44.6% less likely to a violation reported on Form ADV.

Some of this is attributable to marriage status. Minivan drivers are much more likely to be married. After looking at the impact the study still found that the results are not just a by-product of marriage.

Given limited complaince budgets, perhaps it may be useful on the next compliance report to ask your employees what kind fo car they drive to help you focus your compliance efforts on the sports card drivers.

Sources:

  • Lu, Yan and Ray, Sugata and Teo, Melvyn, Sensation Seeking, Sports Cars, and Hedge Funds (December 8, 2016). Available at SSRN: https://ssrn.com/abstract=2882983
  • Sports car drivers make for lousy hedge fund managers, according to new research by Alex Rosenberg
  • When Your Hedge Fund Manager Buys a Ferrari, Find a New Manager by Dani Burger

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