Hedge Fund Hold 'em

Abstract

We find that hedge fund managers who do well in poker tournaments have significantly better fund performance. This effect is stronger for tournaments with more entrants, larger buy-ins, larger cash prizes and for managers who placed in higher positions or who win in multiple tournaments, suggesting poker skills are correlated with fund management skills. After a manager wins a poker tournament, net flows to the manager’s fund increase significantly. These increases are concentrated in cases where there is media coverage of the manager’s poker playing, when the tournament win is bigger, and for more prominent tournaments (e.g. the World Series of Poker). Along with higher net flows, fund alpha also decreases significantly following the tournament win compared to a sample of matched peers, especially in cases where net inflows are highest, suggesting decreasing returns to scale or distractions correlated with higher net inflows erode the informativeness of the poker win signal. Given this, hedge fund investors would be better off investing in an otherwise similar manager without poker tournament success.

Keywords: Poker, Hedge funds, Investor flows, Alpha erosion