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Sensation Seeking and Hedge Funds

58 Pages Posted: 10 Dec 2016 Last revised: 11 Feb 2018

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Yan Lu

University of Central Florida - College of Business Administration

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: December 8, 2016

Abstract

We show that motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation-seeking managers trade more frequently, actively and unconventionally, and prefer lottery-like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation-seeking investors fuel the demand for sensation-seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation-avoiding fund managers.

Keywords: Sensation seeking, Hedge funds, Risk, Operational risk

JEL Classification: G11, G12, G14, G23

Suggested Citation

Brown, Stephen and Lu, Yan and Ray, Sugata and Teo, Melvyn, Sensation Seeking and Hedge Funds (December 8, 2016). 12th Annual Mid-Atlantic Research Conference in Finance (MARC). Available at SSRN: https://ssrn.com/abstract=2882983 or http://dx.doi.org/10.2139/ssrn.2882983

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Yan Lu

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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