Study: If You Went To Harvard, You’re Probably Surrounded by the Rich/Smart, Would Make a Better HF Manager Than One Surrounded By The Dumb/Poor


The Times got servicey this weekend, printing up the findings of a paper that explored the connection between hedge fund returns and the SAT scores of their managers’ colleges, finding: “a strong positive relation between a hedge fund’s performance and the average SAT score at its manager’s school.” Apparently a manager who graduated from a school with a 200-point higher average SAT will earn 0.73% more per year. It’s sort of confusing*—because it’s stupid—but they’re not talking about the SAT score of the actual manager (like: Ken Griffin got a 1280, 590 math/690 verbal**), but the (average) SAT score of the school he went to (Harvard: 1150). The blindingly obvious conclusion is that the more elite the institution attended by your manager, the more money you stand to make as an investor. This is because either a. your manager was smart enough to get into the school with the high SAT scores or b. your manager, perhaps not smart enough but either rich enough or good enough at sports, went to school with smart/rich people who later on were instrumental in the success of his fund.
Basically this study was conducted during cocktail hour at the Yale Club, which is filled with two types of people. The ones who are members because they were smart enough to score the privilege of 4 years in the ghetto of New Haven, and the ones who are members because their parents were rich enough to get them in. The latter half may very well include individuals with the capacity for long division, but it’s not a prereq by any means. Then the researchers went to the Nassau Community College Club—not taking anything away from that institution of higher learning—which may very well have some intelligent individuals as alums, but the probability of it attracting many “sophisticated investors” is small. Then the people who brought us “Investing in Talents: Manager Characteristics and Hedge Fund Performances” went into a database of hedge funds, crunched some numbers, and found that the average returns of the drunks at the YC were somewhat higher than those at NCCC.
Conclusion: if you’re dumb enough to take this standardized test into account (in any sense-- the school's average, the score of the manager who took the test 20+ years ago) when trying to decide which hedge fund to give your money to, or need to be told that having rich friends counts, this totally asinine infovice is probably right up your alley. Might we suggest throwing some money at Pirate Capital, whose manager, being a high school dropout, unfortunately never had to opp to take the SATs?
What SAT Scores Say About Your Hedge Fund [NYT]
*the point of confusion being: why the hell was this “study” conducted?
**prove us wrong, K.


The Smart Indexes Are Even Worse Than The Dumb Ones*

You may have heard that the Dow hit 13,000 today before subsiding to a shameful 12,965.69. You may not have heard this, or cared, because the Dow is for morons, being a price-weighted index of thirty semi-random companies that, gah, aren't even "industrial" any more.** There are alternative theories but those theories are wrong: Joe Weisenthal in defense of the Dow has been noting its very high correlation with other, broader, more sensible indexes. I see this as further undermining the Dow's legitimacy. If it's very different methodology were leading to some kind of meaningfully different result, then we could perhaps argue that it's adding value in some kind of way. But instead what's going on is that the Dow's creators are hand-picking which stocks to include in the index specifically with an eye toward constructing an index that mirrors the other, better indexes out there. Apple and Google, for example, aren't in the Dow and aren't doing to get in any time soon because their very high share prices would skew the index in weird ways. This just goes to show that the Dow's creators already "know" the right answer (from looking at the S&P 500 and the Wilshire 5000) and then are trying to assemble an index to create the predetermined result. Maybe! An alternative theory is maybe suggested by [Occam's razor and] this piece from the Journal this weekend about index funds that I just loved and so am now going to inflict on you at unnecessary length:


Dumb Money, Meet Smart Money

The debut column from new Dealbreaker contributor Owen Davis.


Report: Rich People Still Dumb

Get invited to the right parties and the world is your fraudulent oyster.