“The emerging [hedge fund] manager who goes out and buys a fancy sports car right off the bat is someone you probably want to avoid.”
– informed an article in Business Insider (Singapore), February 2016. But was the statement measurably valid? To find out Stephen Brown, Yan Lu, Sugata Ray and Melvyn Teo set up a research project to empirically investigate the so-called ‘Red Ferrari Syndrome’.
An analysis of 48,778 hedge funds (with reference to the automobile preferences of the funds’ managers, and the funds’ results over time) showed striking results.
“The empirical results are striking. We find that hedge fund managers who purchase performance cars take on more investment risk than do fund managers who eschew performance cars. Specifically, sports car drivers deliver returns that are 1.80 percentage points per annum more volatile than do non-sports car drivers. This represents a 16.61 percent increase in volatility over that of drivers who shun sports cars.
Similarly, drivers of high horsepower and high torque automobiles exhibit 1.14 and 1.25 percentage points per annum more volatility, respectively, in the funds that they manage than do drivers of low horsepower and low torque automobiles.”
See: Sensation Seeking, Sports Cars, and Hedge Funds NYU Working Paper, December 2016.
The photo shows the new, red, Ferrari J50