Home / Analysis / Bare-faced facts: study finds fat-tail risks in alpha males

New research shows broad-faced hedge fund managers tend to take more risks but deliver less alpha for the effort compared to those with more elongated features.

Academics have delivered bad news for fat-faced fund managers – and a possible vindication for the ancient art of phrenology – in a new paper published in the Journal Of Financial And Quantitative Analysis this month.

The study found a link between alpha-male hedge fund managers, defined by a high facial width-to-height ratio (fWHR), and poor investment performance. Based on a theory connecting above-average fWHR with high levels of testosterone in males, the researchers – Yan Lu of the University of Central Florida and Melvyn Teo, from the Singapore Management University – analysed headshots of 2,446 portfolio managers who between them ran 2,629 hedge funds across 1,484 firms.

Dividing the sample group in to fat- and thin-faced managers, the study ranked the relative performance of the two groups from 1994 to the end of 2016. According to the paper, the results show broad-faced hedge fund managers tend to take more risks but deliver less alpha for the effort compared to those with more elongated features.

“While high-fWHR funds do not deliver more volatile returns, their returns feature greater downside deviations, higher downside betas, steeper maximum losses, and sharper maximum drawdowns, suggesting that they bear more left tail risk,” the study says.

The ‘Do Alpha Males Deliver Alpha? Facial Width-to-Height Ratio and Hedge Funds’ report says the outcome is likely due to higher testosterone levels in fatter-faced fundies after correcting for some potential hidden factors.

“… we need to entertain the possibility that people may stereotype broad-faced men as aggressive and deceptive, which in turn could nurture the expected behavior in these men,” the paper says. “Alternatively, facial width could positively relate to facial adiposity and, therefore, negatively related to manager self-discipline.”

To adjust the sample data, the researchers examined the performance records of high-fWHR managers who had experienced one or both of the “two major personal events that lead to sharp declines in testosterone levels for men: marriage and fatherhood”.

“Consistent with this view, we find that marriage and fatherhood substantially attenuate the underperformance of high-fWHR managers relative to low-fWHR managers. In line with prior work showing that testosterone suppression is greater for newly partnered men and fathers with young children, our results are stronger for precisely such fund managers.”

The study also analysed factors such as hedge fund manager purchase of sports cars (digging up vehicle information for 955 managers) and speeding ticket history that supported the association between higher testosterone levels and poor investment performance. Furthermore, the findings translate to equity funds manager, too.

On the upside, fuller-faced managers tend to “raise more capital” for their firms, which appears to be enough of a career-saving quality to counter any investment underperformance. However, Lu and Teo warn against allocating capital based on male fund manager facial features.

“These results are relevant for investment fiduciaries such as university endowments, pension funds, and sovereign wealth funds that allocate capital to hedge funds and other portfolio managers,” the study says. “While some investors may be tempted, based on our findings, to discriminate among fund managers based on facial width, we believe that it is more constructive for investors to select managers based on their assessment of the fund managers’ personality traits associated with facial width (e.g., aggression), since it is ultimately those managerial traits that impact fund performance and investment behavior.”

Female hedge fund managers, still a rare breed anyway, were excluded from the study based on generally understood hormonal differences, the report says, with further research perhaps in the offing.

“These results do not necessarily imply, given the lower circulating testosterone levels of females, that female hedge fund managers outperform male hedge fund managers,” the study says. “Females differ from males in other ways that could also affect performance. For instance, females tend to have higher levels of estrogen than do males and it is not clear how estrogen affects investment performance.”

Judging character on obscure facial data has, of course, a long history with phrenology – that used skull-based measurements to assess criminality, among other behavioural traits – popular from antiquity until well into the 20^th century.

For the record, Lu and Teo are not phrenologists, preferring the scientific definition of high-fWHR as “the measure as the distance between the 2 zygions (bizygomatic width) relative to the distance between the upper lip and the midpoint of the inner ends of the eyebrows (height of the upper face)”.