As if the task of picking a fund portfolio manager who is likely to outperform isn’t hard enough, here’s one more thing to worry about – his or her love life.
According to a recent academic paper, investment performance suffers notably when money managers get married – and when they get divorced.
The paper, entitled Limited Attention: Marital Events and Hedge Funds, examined the impact that the distractions of real life can have on a portfolio manager’s returns. The authors – Yan Lu and Sugata Ray of the University of Florida, and Melvyn Teo of Lee Kong Chian School of Business in Singapore – found there is a significant negative effect on portfolio managers’ performance correlated with both marriage and divorce.
The authors wanted to test the hypothesis of legendary hedge fund investor, Paul Tudor Jones II, who says that he avoids portfolio managers when he finds out they are going through a divorce.
The study compared marriage and divorce records of hedge fund managers with their performance records, and found that both marriages and divorces “are associated with significantly lower fund alpha, during the six-month period surrounding the event and for up to two years after the event.”
The “alpha” generated by hedge fund managers drops, relative to pre-event performance, by an annualized 8.5% in the event of marriage and by 7.4% during a divorce.
According to the paper: “Busy fund managers who manage larger funds and engage in high tempo investment strategies are more affected by marriage.” Further, “…fund managers who depend on interpersonal relationships in their investment strategies are more affected by divorce.”
The paper explains the study’s results by theorizing that these portfolio managers have limited time and attention and that events such as marriage and divorce represent a distraction from their professional endeavours that hurts fund performance.
The paper also suggests that portfolio managers aren’t just trading less frequently during these times or making fewer active bets, which hampers their returns, but also are making worse investment decisions.
“In particular,” the paper says, “fund managers who are tying the knot or undergoing divorce tend to be susceptible to the disposition effect. They are even more likely to hold on to their losses and realize their gains during that period.”
The paper indicates that this research is believed to be the first effort to examine the impact of personal life events on fund portfolio manager performance. The paper also suggests that avenues for further research could include extending the analysis to other types of professional money managers, such as mutual fund managers and private equity fund managers.
The authors also suggest the impact other major life events, such as the birth of a child or the death of a loved one, represent areas for further research.
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