(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
March 29 You probably already knew that hedge
fund names are intended to impress, or even better to confuse
just enough to make you stop asking questions, but most of all
to inspire confidence.
You are, after all, as a hedge fund client, about to hand
over a substantial sum to people whose probity and ability you
cannot measure. Fund names must set the right tone, engender the
So we have the proliferation of funds with names intending
to suggest ritzy addresses or locales, abstruse theorems and
admirable but all-too-rare personal characteristics. “The
Chappaquiddick Binomial Integrity Fund II” is one you can have
for free if you are thinking of starting a hedge fund.
What we now know, thanks to a nifty new study, is that hedge
fund names which sound dignified are sending a signal through
all the noise of marketing, and it is not the one the marketing
Funds named with words which suggest gravitas, that
solemnity and dignity the Romans thought essential to
leadership, attract more investor flows and perform worse,
according to the study. (here)
“Hedge fund investors chase hedge fund names containing a
special combination of words related to economics and
geopolitics, or that convey power,” Juha Joenväärä of Finland’s
University of Oulu and Cristian Ioan Tiu of the University at
Buffalo write in the study.
“Having a name with gravitas is associated with abnormal
Using the Harvard IV psychological dictionary the study
devises a weighting scheme to measure funds whose names suggest
attributes and subjects including politics, economics, power and
influence, a category they term gravitas, looking at a sample of
almost 18,000 hedge funds from 1994 to 2013.
The funny part is, it works: every one word with gravitas
increases the flow into an average fund by $227,120 a year.
The even funnier part, it backfires: funds with positive
gravitas exposure in their names underperform those with
negative gravitas by almost 1 percent of alpha, or
outperformance, a year. Average annualized returns are 0.82
percentage point lower, volatility is higher and average maximum
losses in a given period are higher.
These dignified funds are worse in almost all of the
important ways you can measure, it seems.
A CONFIDENCE GAME
The study suggests that the so-called sophisticated
investors who put money into gravitas hedge funds do learn,
eventually reversing their flows of cash into them. They learn
so well that the gravitas funds are more likely than other funds
to ultimately fail, though perhaps what is being measured here
is not investor learning but that managers without much talent
are more likely to try to hide behind confidence-inspiring fund
The probability of going out of business of funds with the
highest level of gravitas is more than 5 percent higher than
those whose names have no gravitas.
Interestingly the gravitas funds have higher management fees
and lower incentive fees. A management fee the manager gets to
keep no matter what, while a performance fee only kicks in if
pre-agreed hurdles are jumped. It is almost as if these guys
know they are not that good.
Similar studies, with similar results, have been done about
mutual funds, but mutual funds market to the great ignorant mass
of investors, not the supposedly sophisticated hedge fund client
base, most of whom are institutions.
Once again we are reminded of the extent to which financial
services are a confidence game in which the ability to inspire
belief is key to success, at least in terms of attracting
It is also similar, in its ultimate message, to a paper from
February which found that firms with more fund managers and
analysts produced more volatility and were more likely to engage
in benchmark-hugging closet indexing rather than truly active
investing. That suggests that the extra employees were there to
send a confidence-inspiring signal rather than to do actual and
useful work. (here)
The real message is the harder a firm tries to impress you,
the more you should be wary of the value of its services.
Sending a false signal of competence or gravitas is a good
Darwinian tactic in an industry in which there is a huge gap in
knowledge between practitioners and clients.
If you believe that long-term investment outperformance is a
chimera then your investing should be done with institutions
which do relatively easier things, like tracking an index
cheaply, rather than more difficult ones requiring, well,
Like certain great first-growth wines, more gravitas, or
indeed investment skill, is bought than exists.
(Editing by James Dalgleish)