Political Cognitive Biases Effects on Fund Managers' Performance

Abstract

Under rational agent hypothesis, financial industry practitioners should not be affected by political discourse, and investors cannot realize abnormal returns on publicly available information. Rare events, however, may silence rationality and potentiate cognitive dissonance on a spectrum of agents. We assembled a comprehensive dataset of hedge fund performance and matched equity hedge fund managers’ political affiliation by their partisan contributions. We document higher returns of equity hedge funds managed by Democrats for 10 subsequent months — from December 2008 to September 2009. This result is unique and robust to placebo time windows and random partisan affiliation shuffling. We conjecture that the conjunction of the financial crisis, Obama’s election, and politically polarized interpretation of the US central bank policy during that period had an asymmetric impact on hedge fund managers’ perception. In other periods, when the political discourse did not involve central bank policy, there was no statistically significant difference between the performance of equity hedge fund managers depending on their political beliefs.

Keywords: Prospect Theory, Political Biases, Market Efficiency, Money Managers Performance

JEL Classification: D72, G11, G14