Sensation Seeking and Hedge Funds
59 Pages Posted: 10 Dec 2016 Last revised: 20 Apr 2018
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: Suggested Citation