Picking an investment manager is hard.
Not only is the difference between luck and skill hard to distinguish between, but you also have to worry about changes in the investment manager’s circumstances over time.
Maybe he (it is usually a “him”…) worked hard in early years, but becoming rich and splitting time between his new beach house, the ski fields and the city pad he bought for his mistress can have a negative influence on investment performance.
Asset consultants (who choose fund managers for large investors and financial planners) try as hard as they can to cover a range of esoteric factors, but I often feel that asset consultants are trying to quantify the unquantifiable.
With that in mind, a recent paper gives yet another “box to tick” in the selection process. I suspect the research paper was written for the headline only (to be perfectly honest I didn’t bother reading beyond the abstract):
Sensation Seeking, Sports Cars, and Hedge Funds
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. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2882983
Full disclosure: I drive a minivan. Having said that, I have too many kids to fit into a sedan (let alone a sports car), and so you’ll have to make up your own mind on whether that will influence the performance of the MB fund…