Sophisticated Investors Choose Hedge Funds That Sound Big And Heavy
Uranium is the heaviest naturally occurring element. It's also a great name for a hedge fund. Public domain, via Wikimedia Commons.
Naming a hedge fund is hard. All the best geographical features and English surnames are already taken. An enterprising manager might be tempted to say hell with it and use something like the the porn name generator – first pet plus street you grew up on – to title their firm. It's skill, not style, that matters most. Right?
A new research paper suggests otherwise. The study, titled“Hedge Fund Flows and Name Gravitas,” asks a simple question: If the kinds of investors who can hand their money over to hedge funds are indeed sophisticated, then superfluous details like the connotation of a hedge fund's name wouldn't have anything to do with inflows, would they? Alas:
In contrast to this idea of sophistication, we produce direct evidence that hedge fund investors chase hedge fund names containing a special combination of words related to economics and geopolitics, or that convey power. These words are usually associated with weight, influence, authority, seriousness and good judgement - qualities we shall refer to as gravitas. While it is conceivable that hedge funds’ clients may desire their hedge fund managers to exude personal gravitas, what we document is the relatively puzzling fact that investors chase gravitas in the name of the fund itself even after we control for the fund’s manager and for the fund’s performance.
Employing hedge fund databases and language algorithms, the authors find that adding a weighty-sounding name to an otherwise drab hedge fund would theoretically increase inflows by roughly $227,120 a year. This method is, of course, far easier than going through the laborious and cost-intensive process of drafting glossy manuals and attending boring conferences to drum up capital. How Melvin Capital and Brown Trout Management have survived, we can't say.
As a cursory test of the principle, Dealbreaker went down the list of the strongest metals on Earth to see whether savvy managers had already claimed them as their own. As it turns out, titanium, chrome, steel, iron, tungsten, vanadium, and yes, even tantalum grace the names of investment firms. Lutecium and gadolinium are still up for grabs. Appropriately enough, there is already a firm called Gravitas. It provides hedge fund outsourcing.
There's a flip side, however. Funds with higher gravitas ratings in the study also tend to overcharge and underperform. On average, the BlackRocks, Vikings and Renaissance Technologies of the sample exhibited lower alphas, lower sharpe ratios, and higher volatility than their namby-pamby peers. They also failed about 5 percent more often.
This isn't a knock on our friends at, say, Citadel or Kynikos. Although many of the largest and most profitable hedge funds carry an outsize share of gravitas, the researchers found that excess inflows are most pronounced at the smaller end of the spectrum, or when the barriers to investing are lower. Even so, the effect holds to at least a minor degree throughout the hedge fund world.
Anyway, we'd be remiss if we didn't offer some suggestions of future hedge fund names, entirely gratis, for those managers whose marketing abilities lag their investing chops. Unlike existing tools, this list has the benefit of science.
- Bonesaw Group
- Iron Gulch Capital
- Metric Tonne Partners
- Glowering Bluff Management
- Scylla Charybdis & Co.
- Chiseled Investors
- Heft & Girth
- Mahogany Leviathan Associates
- Churchill Cicero Armstrong & Christ
- Unobtanium Capital
- Gneiss Schist Capital Management
- Dark Matter Partners
- Megalodon Associates
- Reichstag Fire Investment Advisers
- Alpha Stone
- San Andreas Asset Management
- Hindenberg Group
- Nuclear Options
- Angela Merkel Inc.
- Sforza-Borgia Associates
