Today in the little known academic world of hedge fund manager gender studies, it has been researched and reported that if you’re a beta-male running a hedge fund, you’re likely to generate more alpha.
So if you've been looking for the mystery behind why so many hedge funds are underperforming over the last couple of years? Well, look no further, because CNBC has shone a light on it: too much testosterone.
That’s right, the "need to know" story of the day today from the "Delivering Alpha" section of CNBC is a report stating that:
Hedge-fund managers with high testosterone underperform those with low testosterone by 5.8 percent each year, according to a study conducted by University of Central Florida and Singapore Management University.
The researchers used software to measure the facial width-to-height ratio — proven to be a proxy for testosterone levels — of more than 3,000 hedge-fund managers. After controlling for variables such as risk and market environment, the researchers found that not only do funds of higher-testosterone managers produce lower returns, but those managers also have a greater propensity to be terminated.+
The report goes on to note that men with too much testosterone often are too quick to sell and too likely to hold onto their losers:
High-testosterone managers "trade more frequently, have a stronger preference for lottery-like stocks and are more likely to succumb to the disposition effect," the report said, referring to the tendency of investors to sell assets at higher prices and holding onto those that have dropped in value.
Finally, the report goes on to state that investors who manage funds of funds are most likely to invest with people that are like-minded. In other words, the sheep are eating their own shit for dinner:
The researchers also found that hedge-fund investors — specifically, hedge fund-of-funds — select managers based on their own testosterone levels. In other words, higher testosterone fund-of-hedge funds are more likely to invest in higher-testosterone managers, while the reverse is true for lower testosterone.
We’re not sure where the hedge fund world could’ve gotten the idea that you need to be an alpha male to dominate in finance. The two former starting NFL linebackers that make daily appearances on CNBC? Having athletes as the selling point at "Real Estate and Bitcoin Expo" scams to fleece sheep from their hard earned coin? Or perhaps it is from articles like these?
Regardless of whether or not this report holds any water, it can’t be doubted that hedge funds are performing piss poor in this environment where the overall "market" has continued to provide relatively consistent returns.
For much of 2017, hedge funds - most of which again underperformed both their benchmark and the broader market - complained that they were not generating alpha for one reason: there was no volatility. Well, they got their wish in spades last month when after months of record low, single-digit VIX, equity vol exploded resulting in a 3.9% slide in the S&P 500 and as 10-year yields backing up.
And so with volatility spiking, and what every commentator saying it was a "stockpicker's market" hedge funds surely had a blockbuster month, right?
Well, no, quite the opposite in fact: according to the Bloomberg Hedge Fund database, in February hedge funds posted an overall drop of 2.19%, wiping out all of January's gains, and leaving them flat for the year. Yes, somehow the month that all hedge funds were waiting for lead to widescale losses and last month ended up being the worst month for hedge funds since January 2016, when they slumped 2.57%.
In February we ran down which hedge funds got hit to start off 2018. Many "marquee" names started the year off by underperforming the S&P. For some big names, like Greenlight Capital, things have gotten even worse since then.
In late February, Einhorn said on a conference call for his Greenlight Capital Re, that his hedge fund was experiencing its worst underperformance ever, as it suffered a 12% decline in the first two months of the year.
Greenlight has posted lackluster returns in recent years as markets, especially for growth stocks, have risen while the hedge fund has stuck to its value-investing strategy.
According to Bloomberg, Einhorn’s main hedge fund fell another 1.9% in March, extending its loss this year to 14%.
The moral of the story? Next time you look to invest in a hedge fund, you may want to consider Bill Gates instead of Bill Ackman.