Both marriage and divorce have a measurably negative effect on the performance of hedge funds, new research suggests.
Hedge funds consist of capital pooled from multiple sources which is then invested in stocks and securities. The extent to which a particular fund outperforms other funds in the returns and profit generated is referred to as its ‘alpha’.
Economists from the University of Florida examined the personal lives of 786 hedge fund managers between 1994 and 2012 and compared these to the performance of their funds over that period. The alpha of funds controlled by managers going through a divorce fell by an average of 7.39 per cent, they found, while the alpha of funds fell even further if the manager married while in the position – by 8.5 per cent.
The researchers also detected differences in the types of fund managed. The performance of larger funds requiring a rapid investment cycle was more affected by a manager’s marriage, while smaller funds dependent on personal relationships were more likely to decline if the manager divorced.
Marriage and divorce have the biggest effect on solo operators said report author Dr Sugata Ray. Hedge fund managers who work independently “get clobbered when they go through marriages and divorces. They start to fall prey to behavioral biases, like selling their gains and holding on to their losses longer than they should.”
The report, entitled Limited Attention, Marital Events, and Hedge Funds, is available here.