Let’s just hope your fund manager is over his or her divorce when it comes to swapping out stocks and bonds in your portfolio.
Researchers at the University of Florida have discovered that hedge fund managers who are distracted by marriage or a breakup pay less attention to investments, which can cost investors dearly in potential gains.
“We find that marriages and divorces are associated with significantly lower fund alpha, during the six-month period surrounding the event and for up to two years after the event,” the researchers said. A fund’s alpha is its return in excess of the fund’s comparative benchmark index.
The researchers include Yan Lu and Sugata Ray of the University of Florida and Melvyn Teo of Singapore Management University. They looked at marriages and divorces among hedge fund managers from January 1994 to December 2012 in 13 states, including Georgia.
The researchers said the hedge funds’ alpha fell by an annualized 8.50 percent during a manager’s marriage and 7.39 percent during a divorce.
Hedge funds are similar to mutual funds mostly in that managers pool investors’ money to make and manage investments. Hedge funds, however, use alternative strategies that are considered highly risky in their quest for high returns. The funds may rely on derivatives or invest with borrowed capital as part of their strategy.
The difference between the proportion of gains realized and the proportion of losses realized widens during a marriage and a divorce, indicating that inattentive hedge fund managers are more prone to the swings, the researchers said.