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How To Avoid The High-Testosterone Mistakes Made By Hedge Fund Managers

Mar. 05, 2018 2:26 PM ET4 Comments
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It would be easy to assume that the brightest minds in high-stakes professional trading don’t suffer from the same behavioural mistakes as regular investors. But that’s not actually true. Research shows that high testosterone - which has traditionally been a ‘must-have’ in hedge fund management - is actually responsible for some of the worst decisions.

It turns out that some classic alpha male attributes can lead to risky and potentially costly choices. Among them are picking ‘lottery-type’ stocks, hanging on to underperforming trades and selling winning positions too soon.

These are some of the classic hallmarks of overconfidence, which leads to rash decision making and overtrading. These problems can affect private and professional investors alike - although women, for biological reasons, are apparently better at resisting them.

The trouble with hedge funds

In Warren Buffett’s latest letter to Berkshire Hathaway shareholders, he spends time reflecting on a 10-year charity bet that finished in late 2017. As part of the wager, he predicted that a low-cost index fund would outperform the results of most investment professionals over time.

His bet was taken up by a fund advisor called Protégé Partners, which went head-to-head with the index fund by selecting five funds-of-hedge-funds. In total, Protégé’s capital ended up being spread across more than 200 hedge funds.

To cut a 10-year story short, Buffett won this bet long before it finished. In nine out of the 10 years the funds-of-funds as a whole trailed the Samp;P index. Not only that, but in every one of those years they charged costs at an average of 2.5 percent of assets.

As Buffett remarked: “Making money in that environment should have been easy.” But the hedge funds still managed to underperform overall, while charging high costs for the privilege.

Costs in the hedge fund industry have

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Comments (4)

thkalinke profile picture
Seriously, good article! If nothing else, testosterone fuels the need to "don't just sit there, DO SOMETHING." Over-trading can and does kill investment returns. Now, I have to go find my calipers...
SkylarH profile picture
Valuable article. Unfortunately, no doubt it will be under-read here on SA.
Buyandhold 2012 profile picture
High testosterone mistakes?

You might be on to something.

I did my best investing at age 14 and my worst investing between age 25 and age 40.

Maybe my testosterone level was lower at age 14 than between the ages of 25 and 40.

Or, more likely, I took my mother's investment advice at age 14, and sometimes ignored her advice between the ages of 25 and 40.

I never checked my mother's testosterone levels, but I suspect they are low. And she has always been one hell of a good investor.

High testosterone levels cause some men to make foolish investment mistakes. Trading too much. Buying the wrong stocks. Selling.

These high testosterone guys need to consult with their mothers before making investment decisions. After all, didn't Mom tell you not to go out in the winter without your hat on?
SqueezeMetrics profile picture
"Behavioral finance" is now "hormonal finance."

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