Don’t Invest When a Fund Manager is Divorcing

By The Law Offices of Ronald H. Kauffman of Ronald H. Kauffman, P.A. posted in Divorce on Monday, March 30, 2015.

Have you ever wondered if your stock market investments are impacted by your broker’s divorce? A recent study from the University of Florida shows that divorce can have an impact on a funds stock market performance.

Knowing if someone is going through a divorce can be an investment decision. A hedge fund’s alpha – the measure of how much it beats the market – has been shown to fall by an annualized 7.39 percent during a divorce.

Busy fund managers, who manage larger funds and engage in high tempo investment strategies, are more affected by marriage.

The study also found that fund managers who depend on interpersonal relationships in their investment strategies are more affected by divorce. Behavioral biases may partially explain the connection between inattention and performance deterioration.

An even more surprising result is that marriage actually does more damage to a fund manager’s performance, according Dr. Sugata Ray, one of the paper’s authors.

I’ve written before about the impact that a divorce can have on stock performance by comparing the stock performance during Rupert Murdoch’s divorce and the divorce of Harold Hamm.

Divorce has always been a red flag for savvy investors. Hedge fund manager Paul Tudor Jones II, said he withdraws his money from a fund when a manager’s marriage breaks up.

“You can automatically subtract 10% to 20% from any manager when he is going through a divorce,” he told a conference in 2013.

(Jones also famously noted at that same conference that women who have children can’t be great traders, so perhaps we’ll take his opinion with a grain of salt.)

Younger fund managers tend to have more performance problems around a divorce. The annualized alpha of younger fund managers fell by 15.7% when they got divorced, while older managers only lost 4.1%.

One hedge fund manager, Ken Griffin, hasn’t been affected (yet) by marital strife. He is in the middle of one of the most public and nasty divorces in recent memory. Despite that, his company’s three big funds have continued to outperform the market.

Another big factor is whether a fund manager has partners to help steer the ship during a crisis. Managers that work alone “get clobbered when they go through marriages and divorces,” said Ray. “They start to fall prey to behavioral biases, like selling their gains and holding on to their losses longer than they should.”

The findings were based on data collected from 1994 to 2012, tracking 786 managers who went through 857 marriages and 251 divorces.

The CNN article is available here.