Leon Cooperman drives a used Passat. David Einhorn tools around in an old Honda Odyssey. Paul Tudor Jones, meanwhile, has two Cadillac Escalades, a Mercedes GL450 and a Maybach, among other luxury vehicles.
As the stereotype goes, managers who drive hot rods are similarly thrill-seeking in their trading. Turns out the stereotype is true. In a new study, a trio of researchers compared hedge fund returns to car ownership records. Their conclusions are pretty much what you'd expect: the faster the car, the more likely the owner is a risk-taker.
To be exact, a hedge funder who owns a sports car on average deliver returns that are 16.6 percent more volatile than more boring drivers. On the other hand, managers with “practical but unexciting cars” – minivans and the like – take lower risks on average. The Honda Odyssey drivers of the hedge fund world bring in returns that are 11.7 percent less volatile than the rest.
The study hinges on the theory that sensation-seeking spans the personal and professional lives of hedge funders. A hedgie who buys a Bugatti might be chasing the same feeling he gets from an impulsive billion-dollar market wager. The researchers cite other examples of thrill-seeking among hedge funders, like Pierre Andurand kickboxing or Dan Loeb running triathlons. No mention of Bill Ackman's fierce tennis game.
For the discerning investor who could care less about the driving habits of hedge funders, there's a bottom-line takeaway: Fancy drivers deliver lower risk-adjusted returns. A one-standard-deviation increase in horsepower correlates to a 0.18 reduction in a fund manager's Sharpe ratio – that is, a 21.4 percent decrease relative to the entire data set.
A standard deviation higher in vehicle occupancy – the minivan metric, let's call it – meant a Sharpe ratio 0.18 in the other direction. Prudence pays.
That's not to say it's possible to make an either-or judgment about a hedge funder's risk tolerance based purely on vehicle choice. Steve Cohen, of course, drives a Zamboni. And Ackman? He owns both a Volvo and a Ferrari. What that means is anyone's guess.