investing in talents manager characteristics and hedge strongfundstrong.pdfVIP

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol. 46, No. 1, Feb. 2011, pp. 59–82 COPYRIGHT 2011, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195 doi:10.1017/S0022109010000748 Investing in Talents: Manager Characteristics and Hedge Fund Performances Haitao Li, Xiaoyan Zhang, and Rui Zhao∗ Abstract Using a large sample of hedge fund manager characteristics, we provide one of the first comprehensive studies on the impact of manager characteristics, such as education and ca- reer concern, on hedge fund performances. We document differential ability among hedge fund managers in either generating risk-adjusted returns or running hedge funds as a busi- ness. In particular, we find that managers from higher-SAT (Scholastic Aptitude Test) un- dergraduate institutions tend to have higher raw and risk-adjusted returns, more inflows, and take fewer risks. Unlike mutual funds, we find a rather symmetric relation between hedge fund flows and past performance, and that hedge fund flows do not have a signifi- cant negative impact on future performance. I. Introduction An investment in a hedge fund is really an investment in a manager and the specialized talent he possesses to capture profits from a unique strategy. (Grossman (2005)) Hedge funds have experienced tremendous growth in the past decade. Ac- cording to the Securities and Exchange Commission (SEC) and various hedge fund research companies, the amount of assets under management (AUM) by hedge funds has grown from about $15 billion in 1990 to about $1 trillion by the end of 2004, and the number of existing hedge funds is about 7,000 to 8,000. As a result, hedge funds have attracted enormous attention from a wide range of market participants and academics in recent years. ∗Li, htli@, Ross School of Business, University of Michigan, 701 Tappan St., Ann Ar- bor, MI 48109; Zhang, zhang654@, Krannert S