High Sat Scores, High Hedge Fund Returns?
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Those darn SAT scores will always come back to haunt you — especially if you're a hedge fund manager. At least according to the findings of a recent study titled “Investing in Talents: Manager Characteristics and Hedge Fund Performances.” The researchers, Haitao Lee, an assistant professor of finance at the University of Michigan; Xiaoyan Zhang, an assistant professor of finance at Cornell; and Rui Zhao, a research associate in the portfolio management group of BlackRock, found that hedge fund managers who received undergraduate degrees from institutions with higher average SAT scores regularly posted higher relative — and even risk-adjusted — returns, took less risk and gathered more assets.
The authors of the study provided the following example: Everything else being equal, a manager who graduated from Yale with an SAT score of 1480 could expect to generate returns that are 0.73 percent better than a manager who graduated from George Washington University with an SAT score of 1280.
Earlier studies have shown that mutual fund managers from higher-SAT institutes tend to have higher raw returns, but not necessarily higher risk-adjusted returns. The report's authors said this variation can be explained by the differences in the way hedge fund and mutual fund managers are paid. Because the latter are typically paid on total assets rather than on performance, they have an incentive to let the funds get too big to manage effectively.
Separately, the researchers found that extra work experience hurts rather than helps hedge fund managers' returns — for example, a manager with five years less work experience could expect to generate returns that are 0.53 percent higher. That supported their assumption that younger managers have “stronger incentives to work hard at their jobs, and are more willing to take risks, and consequently tend to have better performance than older and more established managers,”
The researchers used data on managers from more than 4,000 hedge funds covered by TASS between 1994 and 2003.
