It would be easy to assume that the brightest minds in high-stakes professional trading don’t suffer from the same behavioural mistakes as regular investors. But that’s not actually true. Research shows that high testosterone - which has traditionally been a ‘must-have’ in hedge fund management - is actually responsible for some of the worst decisions.

It turns out that some classic alpha male attributes can lead to risky and potentially costly choices. Among them are picking ‘lottery-type’ stocks, hanging on to underperforming trades and selling winning positions too soon.

These are some of the classic hallmarks of overconfidence, which leads to rash decision making and overtrading. These problems can affect private and professional investors alike - although women, for biological reasons, are apparently better at resisting them.

The trouble with hedge funds

In Warren Buffett’s latest letter to Berkshire Hathaway shareholders he spends time reflecting on a 10-year charity bet that finished in late 2017. As part of the wager, he predicted that a low-cost index fund would outperform the results of most investment professionals over time.

His bet was taken up by a fund advisor called Protégé Partners, which went head-to-head with the index fund by selecting five funds-of-hedge-funds. In total, Protégé’s capital ended up being spread across more than 200 hedge funds.

To cut a 10-year story short, Buffett won this bet long before it finished. In nine out of the 10 years the funds-of-funds as a whole trailed the S&P index. Not only that, but in every one of those years they charged costs at an average of 2.5 percent of assets.

As Buffett remarked: “Making money in that environment should have been easy.” But the hedge funds still managed to underperform overall, while charging high costs for the privilege.

Costs in the hedge fund industry have long divided opinion. The typical ‘2 and 20’ fee model (2 percent on assets and 20 percent on outperformance) has come under pressure in recent years, but the fees are still controversially high. So it’s little wonder that this promotes a testosterone-fuelled environment that attracts strong characters with forthright views.

If your face fits…

High testosterone, of course, is linked with a number of benefits. They range from increased physical strength and fearlessness to higher military rank and superior executive leadership. But some research has also found that it can lead people to make irrational…

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