Doubling Down

42 Pages Posted: 6 Sep 2014

Date Written: June 7, 2014


I demonstrate that when investment fund managers “double down” on positions that have run against them, they outperform. Specifically, I find that a portfolio formed of the U.S. equity positions that hedge fund managers add to after recent stock-level underperformance generates significant annualized risk-adjusted outperformance of between 5% and 15%. This finding is not the result of a simple reversal effect, of a fund’s best ideas (large positions), or of the general informativeness of fund trades. My results are consistent with a career risks mechanism for this phenomenon. By adding to a losing position — the opposite of window dressing — managers are making their losses particularly salient. I demonstrate in a panel regression that investment managers avoid adding to losing positions. Furthermore, managers outperform by more when they double down after greater past losses in a position. These findings suggest a position-level limits to arbitrage effect. Even when an asset decreases in price for non-fundamental reasons, some of the investment managers with the most relevant knowledge of that asset may be particularly hesitant to add to their positions because they have already suffered losses in that asset.

Keywords: Hedge Funds, Investment Manager Skill, Career Risks, Limits to Arbitrage

JEL Classification: G12, G14, G23

Suggested Citation

Rhinesmith, Jonathan, Doubling Down (June 7, 2014). Available at SSRN: or

Jonathan Rhinesmith (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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