Why Advisors Shouldn't Drive Fast Red Cars

New research finds that a hedge fund manager’s car could predict how their funds perform, Sugata Ray tells Barron’s. Perhaps unsurprisingly, fast cars could mean higher risks with no extra returns, according to Ray, a professor and researcher at the University of Alabama who’s one of the authors of a recent report linking the two, the publication writes.

How a Person’s Car Can Be Used to Determine Their Behaviour

Researchers used traits such as speed and torque as flags for sensation-seeking, which correlated with greater risk-taking, he tells Barron’s. These risks, according to Ray, offered no extra returns — resulting in lower Sharpe ratios, the publication writes. Additionally, those funds had higher operational risk, such as ADV violations, he tells Barron’s. According to Ray, sensation-seeking is looking for novel experiences — and cars can be a good way to observe this, the publication writes. 

The researchers, Stephen Brown, Yan Lu, Melvyn Teo and Ray, found hedge fund managers on the Vehicles Purchase Records Database, he tells Barron’s. They then compared this with hedge fund data, such as when the funds were founded, their returns and fees charged, using sources such as Hedge Fund Research, Thomson Reuters Lipper TASS Hedge Fund data and Morningstar, Ray tells the publication. 

The study also found some evidence that these sensation-seeking managers are supported by sensation-seeking investors, he tells Barron’s. On the flipside, sensation-avoidant managers — those driving minivans — will have lower Sharpe ratios with the same returns, but sensation-avoidant investors aren’t necessarily drawn to them, according to Ray.

There is some evidence from previous studies that the type of car a person drives could actually change the way they act, he tells Barron’s. However, by comparing fund performance before and after a car purchase, it seems the car doesn’t affect risk, but rather reveals a risk-taker, Ray tells the publication.


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