The Marriage Effect

“By all means marry; if you get a good wife, you’ll become happy; if you get a bad one, you’ll become a philosopher.” Socrates (469 BC – 399 BC) Greek Philosopher

Who should be allowed marry? That is the question currently being debated in Ireland ahead of the Marriage Equality Referendum in May. I am indifferent when it comes to the institution of marriage. However, if people will feel more secure and equal under the blanket of this institution then why leave them out in the cold? While it is easy to get philosophical on the idea of marriage, it is something that has relevance when analysing the custodians of your wealth, investment managers.

A recent paper – Limited Attention, Marital Events, and Hedge Funds – explored the impact of marital events on hedge fund returns, looking at 26,811 hedge funds between 1994 and 2012. They found that personal events such marriage and divorce significantly hurt performance, with the latter having the more durable impact on performance.

“We find that marriages and divorces are associated with significantly lower fund alpha, during the six-month period surrounding the event and for up to two years after the event. Relative to the pre-event window, fund alpha falls by an annualized 8.50 percent during a marriage and 7.39 percent during a divorce……….our findings suggest that limited investor attention can hurt the investment performance of professional money managers”.

This is hardly a revelation but it is something that may not be given enough consideration when carrying out due diligence and monitoring of investment managers. It is particularly relevant in the world of hedge funds, since they tend to be defined by one key person. While research will highlight key man risk, it has to also address the tougher questions around their personal life.

Bottom line: stability in the personal life of a money manager allows them the attention needed to have any chance of providing stable returns in an often unstable market environment.