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Why Poker Players Might Make Better Investors

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Why Poker Players Might Make Better Investors

The stock market is often compared to a casino, but some of the most successful professional investors may also be the most talented gamblers as well.

Hold 'Em

A recent study by the University of Alabama and the University of Central Florida found that the funds of hedge fund managers who perform well in professional poker tournaments also happen to outperform their peers. The paper, entitled “Hedge Fund Hold ‘Em,” found high-profile poker wins by hedge fund managers also help fund inflows, suggesting investors intuitively like poker performance and investing performance.

“This effect is stronger for tournaments with more entrants, larger buy-ins, larger cash prizes and for managers who win multiple tournaments, suggesting poker skills are correlated with fund management skills,” the authors write.

Why It's Important

The researchers found statistically significant outperformance among hedge funds with managers who have won at least one poker tournament. These funds averaged monthly returns of 0.67% compared to 0.58% for hedge funds with otherwise similar characteristics, according to data from online poker database The Hendon Mob.

Greenlight Capital founder David Einhorn famously came in third place in one of the biggest poker games in history. Point72 founder Steve Cohen has also said poker was instrumental in his understanding of risk management.

But Be Careful

Unfortunately, according to the paper, high-profile poker wins may actually be detrimental to these fund managers’ performance. While these managers funds outperformed prior to winning tournaments, their alpha took a hit following the wins. The researchers said this deterioration in performance was steepest in funds with the largest net inflows, indicating its more difficult to outperform as the size of the funds get larger.

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Posted-In: David Einhorn Greenlight Capital Point72 Steve CohenEducation Hedge Funds Psychology General Best of Benzinga

 

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