Are Hedge Fund Managers Born or Made?

December 15, 2011

Nature versus nurture? The argument is as old as Sigmund Freud’s first couch and might never be resolved. Still, the question remains for every field of endeavor, hedge fund management included:

Do you need to be born with something special to do this well, or can anyone be trained to do this?

A recent blog entry by Steve W. Martin on the Harvard Business Review’s site posits “70 percent of top salespeople are born with ‘natural’ instincts that play a critical role in determining their sales success.” Martin isolates four factors that indicate that someone will make a good salesperson: language specialization (ability to converse), modeling of experiences (intuition about how to respond to questions), political acumen (understanding others’ interests) and greed (greed).

Only one of these seems to apply to hedge fund managers. But it goes beyond just obsession with filthy lucre, doesn’t it? Whether one wants to be the best at running a hedge fund, writing the great American novel or stuffing a big ball through a small hoop, there’s a drive for excellence that has to precede any discussion of any other traits. The question is, can this be acquired or is this part of the individual’s hard-wiring (“heritable,” to the experts)?

“The need for achievement is heritable,” says Nathan Kuncel, Marvin Dunnette Distinguished Professor of Industrial and Organizational Psychology at the University of Minnesota. Even so, he says, it’s not a static factor. “Situational factors can increase that.”

These factors can include praise as well as money, according to Kuncel.

Those other sales-y traits from the HBR article are important to anyone marketing a hedge fund, but are those the skills that the typical B-school grad who’s starting a hedge fund is likely to possess? By all accounts, no.

“Lots of guys are naturally inclined and have [quant] gifts but they completely fall off the wagon when it comes to marketing, sales and relationships with investors,” says Dennis Ford CEO of Southborough, Mass., alternative investment firm Brighton House Associates.

His job is to pick winners from among the 7,000 managers on his radar with less than three years’ experience and under $150 million in assets. “They’re genetically smart with analytics but they’re not known for their ability to interact with other humans.”

He says he has never run into a case where anyone with innate sales skills for marketing a hedge fund has gone through the rigor of training themselves in the numeracy required for managing the portfolio. The inference is that as hard as it is for a numbers guy to learn interpersonal skills, it’s harder for a life-of-the-party type to buckle down and do quantitative analysis. This is consistent with the research.

“Heritability for cognitive ability is a little higher than heritability for personality,” Kuncel says.

But put the emphasis on “a little”. It’s not a hopeless task for a numerically oriented manager who’s starting a hedge fund to take the next step and develop the sales acumen required to round out the skill set incumbent on any entrepreneur, whether a hedge fund manager or a plumber. Nor is it a completely lost cause — just because it isn’t frequently attempted — for a natural people-person to become an Excel power-user. Everybody in any field of endeavor blends their natural talents with abilities they’ve since acquired.

“No one’s born with the skill to do much of anything,” Kuncel concludes.

Looking for a database of hedge fund managers? Check out the emerging manager database from Whitehall Data.

 

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