What Your HF Manager’s Resume Means for Returns

Former asset owners achieve double the alpha of the average manager, according to a study of UK hedge funds.

A manager’s employment history says a lot about how their hedge fund will perform, research has suggested.

Managers who share a specific background also tend to share attitudes toward risk-taking and other investment strategies, argued Marc Gerritzen and Jens Carsten Jackwerth of the University of Konstanz, and the University of Lugano’s Alberto Plazzi.

“Hedge fund managers may acquire portable skills and expertise at a former employer or industry,” the authors wrote. “Former employees who worked in the life insurance industry may develop an attitude toward risk that is different than that of employees in the banking sector.”

By analyzing the employment histories and portfolios of UK hedge fund managers, the researchers found “strong evidence” of similar exposures to systematic risk factors, abnormal performance, and idiosyncratic shocks among managers who were connected to each other through past employment at the same firm or in the same industry.

“We take this evidence as supportive of a direct effect of social ties on managers’ decisions that goes beyond personal characteristics and innate skills,” they wrote.

Of the 1,799 managers studied, 1,138 were linked to at least one other individual through past employment in the same industry. About 37% of managers were “outsiders” who joined the hedge fund industry without prior experience working in finance.

Managers who previously worked at a pension fund or bank outperformed their peers, with former pension fund employees achieving double the alpha of the average hedge fund manager.

“Connections within the pension fund and the banking industry influence hedge fund alpha positively and significantly,” the researchers wrote.

Those who came to hedge funds from asset management firms, on the other hand, underperformed, with alpha “almost completely wiped out.” Alpha for managers coming from the mutual fund industry was also negative.

Related: Did You Go to the Best School of Asset Management? & Majority of Hedge Funds Are Contrarian, Study Finds