How Money Managers' Personal Lives Affect Your Investments

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For some people who discover a sudden drop in their investments, social science research offers a surprising explanation. When a hedge fund manager gets divorced, they underperform by 7.4 percent.

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Transcript

DAVID GREENE, HOST:

Turns out the people who manage your investments may not exactly be on their game if things aren't going well at home. We spoke about this with NPR's social science correspondent, Shankar Vedantam.

SHANKAR VEDANTAM, BYLINE: This is new research, David, that looks at why people might suddenly see a decline in their investments, and this is a somewhat unusual reason. Specifically, this research looks into the personal lives of hedge fund managers. I spoke to Sugata Ray at the University of Florida, along with Yan Lu and Melvyn Teo. Ray tracked down divorce statistics in states such as California, Connecticut, Florida and Texas to figure out when and whether hedge fund managers get divorced. He then analyzed the performance of the hedge funds around this time to see if the emotional turmoil had an effect on the manager's performance. Here he is.

SUGATA RAY: When a hedge fund manager gets divorced, they underperform to the tune of 7.4 percent. So if the average hedge fund's performance is maybe 10, 12 percent a year, if they're good, you're losing two-thirds of that, annualized.

GREENE: Two-thirds - the performance drops by two-thirds if the manager's going through a divorce? That seems crazy. I mean, I guess someone's distracted going through divorce, obviously, but that's a big number.

VEDANTAM: It is a big number, David. Now, at one level, I think you could argue this is intuitively obvious - that when something's going on in your personal life - a divorce - it's going to affect you at work. But I think what the study actually points to is the value of actually using data to confirm or disconfirm our intuitions because in this case, Ray found something else, as well.

Now, most of the hedge fund managers he studies were men. And it does seem obvious that when your marriage is falling apart, you would do worse at work, but most people might think that when a hedge fund manager gets married, you would see the opposite effect. If someone is happy in his personal life, it should have a positive effect on work.

In fact, Ray finds that marriage, if anything, has a worse effect than divorce when it comes to the performance of hedge funds. As Ray put it, marriage might be a nice thing that happens in the life of the manager, but even so, the manager now has his attention distracted by his lovely bride, and the performance of the hedge fund tanks.

GREENE: Moral to the story - always look for a hedge fund manager who is never even contemplating marriage ever.

VEDANTAM: (Laughter) You know, David, I'm not sure how a recommendation of a life of chastity would go down in the hedge fund industry. Ray and his colleagues, in some way, have a better suggestion that data seems to show that managers do not experience a decline in performance when they have partners who can help them. Here he is

RAY: Hedge funds where there's more than one manager - for that set of funds, we don't find any bad facts of marriage and divorce on performance. So it's mainly concentrated in very busy hedge fund managers managing more than one fund or in funds where there is a single hedge fund manager running the show.

VEDANTAM: So you know what, David? The moral of the story here might be that if you're someone who's managing millions of dollars of other people's money, it might not be a bad idea to get some help and have someone cover for you, you know, when you're emotionally distracted.

GREENE: All right. Shankar, interesting stuff, as always.

VEDANTAM: Thank you, David.

GREENE: The familiar voice of Shankar Vedantam. He regularly joins us to talk about social science research. You can follow him on Twitter - @hiddenbrain - and this program is @morningedition. Transcript provided by NPR, Copyright NPR.