Political Cognitive Biases Effects on Fund Managers' Performance

Abstract

Who does a better job of managing money: Republicans or Democrats? 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 produce polarized narratives that go viral and potentiate cognitive dissonance on a spectrum of agents. We assembled a comprehensive dataset of equity hedge funds performance and matched the managers' political affiliation by their partisan contributions. We document higher returns of funds managed by Democrats for ten subsequent months --- from December 2008 to September 2009. This result is unique and robust to a set of randomized quasi-experiments. 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 in fund managers’ performance depending on their political beliefs.

Keywords: Political Biases; Money Managers' Performance

JEL Classification: D72, G11, G14