High-testosterone managers “trade more frequently, have a stronger preference for lottery-like stocks and are more likely to succumb to the disposition effect,” the report said, referring to the tendency of investors to sell assets at higher prices and holding onto those that have dropped in value.
The researchers also found that hedge-fund investors — specifically, hedge fund-of-funds — select managers based on their own testosterone levels. In other words, higher testosterone fund-of-hedge funds are more likely to invest in higher-testosterone managers, while the reverse is true for lower testosterone.
The results of the study may have implications for hedge-fund performance as well as hedge-fund culture, which tends to prize aggression, competitiveness and drive.
If this study is true, perhaps the prevalence of alpha males is what’s eroding alpha.
Hedge funds have largely underperformed the S&P 500 during the current bull market. And they’ve continued to underperform even as the market has gotten more volatile. In aggregate, hedge funds have returned 0.14 percent this year, according to Hedge Fund Research. That compares with a 1.3 percent gain for the S&P 500.