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Opalesque Roundup: How hedge fund investors get consistently fooled by fund names: hedge fund news, week 13

Monday, April 03, 2017

In the week ending 31 March, 2017, a new research has shown that investors allocate more flows to hedge funds whose names exhibit gravitas - defined as a combination of words from geopolitics and economics, or suggesting power.

The economic effects are relatively large: averaging across the researchers' models, adding one more word with gravitas to the name of the average fund brings more than a quarter million dollars more in annual flows.

However, having a name with gravitas is associated with abnormal negative performance: high name gravitas funds have lower returns, alphas, Sharpe ratios and manipulation-proof performance measures, higher volatilities and maximum drawdowns as well as higher probabilities of extinction than the funds with lower name gravitas.

Although we find evidence that investors learn about the true investment abilities of their funds and respond less to gravitas as they do so, the chasing gravitas behavior survives all these controls.

Another finding was that hedge fund managers running funds with more name gravitas report to fewer databases, suggesting that giving the fund a "good" name serves as an alternative form of marketing. The researchers believe their results are robust to a generous battery of additional tests, including corrections for potential endogeneity issues or for whether the fund only accepts qualified investors.

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