We show that motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.

The empirical results are striking. We find that hedge fund managers who purchase performance cars take on more investment risk than do fund managers who eschew performance cars. Specifically, sports car drivers exhibit annualized return standard deviations that are 1.80 percentage points, or 16.61%, higher than those of nonsports car drivers. Similarly,funds managed by drivers of high horsepower and high torque automobiles deliver more volatile returns. Conversely, we find that managers who acquire practical but unexciting cars take on less investment risk relative to managers who shun these cars. Minivan owners,for example, generate annualized return standard deviations that are 1.28 percentage points,or 11.74%, lower than do other owners. Moreover, managers who purchase cars with high passenger volumes and excellent safety ratings also produce more stable returns.

source: ML