The alpha of ugliness

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Now this is just delightful. From a paper by Chengyu Bai and Shiwen Tian of Shanghai Jiao Tong University (H/T former Alphavillain Tracy Alloway):

We study the relationship between stock fund managers’ facial attractiveness and fund outcomes. Utilizing the state-of-art deep learning technique to quantify facial attractiveness, we find that funds with facial unattractive managers outperform funds with attractive managers by over 2% per annum. We next show that good-looking managers attract significant higher fund flow especially if the funds are available on Fintech platforms where their photos are accessible to investors. Good-looking managers also have greater chance of promotion and tend to move to small firms. The potential explanations for their underperformance include inadequate ability, insufficient effort, overconfidence and inefficient site visits.

There’s a lot to unpack here. The tl;dr is that Alphaville should probably launch a hedge fund [I’ll stay hot and poor, thanks — Ed]. But you’ll probably be most interested in how they graded attractiveness.

Here’s some more detail. Apparently you should give all your money to the two fund managers at the far left.

You may think this might just be a Chinese phenomenon, or at least a phenomenon in less developed markets rather than the more rigorous, quantitative, empirical US or Europe. But this is not an entirely new finding, nor exclusive to China, even if studies elsewhere have mostly just focused on flows.

Here is a 2021 paper by Gajanan Ganji of the University of Chicago, Arati Kale of Providence College and Devendra Kale of the University of Rhode Island that looked at Morningstar’s data for US funds and scraped photos of their managers’ faces from LinkedIn and their company’s websites. They found that:

. . . after controlling for fund characteristics, performance measures and manager characteristics, mutual funds managed by ‘attractive’ managers receive higher fund flows. Our results are robust to matched sample analysis, Heckman two-stage selection, alternate model specifications. Attractiveness bias is predominantly witnessed within retail investors and does not entail superior fund performance. Our results suggest that mutual fund investors exhibit a bias for seemingly attractive mutual fund managers.

And here is a 2014 paper by Ankur Pareek of Bucknell University and Roy Zuckerman of Rutgers that looked at hedge fund managers and discovered that “trustworthy”-looking ones on average do worse but attract more investor dosh.

Controlling for past-performance, we find that hedge fund managers whose photographs are rated as more trustworthy are able to attract greater fund flows, in the medium performance range, and have a less convex flow-performance relationship compared to the managers rated as less trustworthy. We also find that “trustworthy” managers are more likely to survive given poor past-performance and generate lower risk-adjusted returns when compared to managers who are perceived as less trustworthy. We attribute this phenomenon to over-investment with “trustworthy” managers caused by an investor bias.

Sadly, these other papers didn’t include photos of the money managers that were rated, so we can’t say whether or how those surveyed ranked the relative hotness of Bill Gross, Bill Ackman, William Danoff, Ken Griffin or Jim Simons.

If you are attractive, and now worried you might not be suited for money management, fear not: your looks might be more of an asset in research!

Here is a 2019 paper that found that good-looking analysts made more accurate earnings forecasts and better short-term stock picks than their uglier peers, perhaps because they get better access to management at the companies they cover, are more sought after by investors and get more help internally.

We find that attractive analysts make more accurate earnings forecasts than less attractive analysts. Moreover, more attractive analysts make stock recommendations that are more informative in the short run and more profitable in the long run. Further analyses reveal that attractive analysts attain their better job performance at least partly through their privileged access to information from firm management. For the sources of the beauty effect, we find that more attractive analysts gain more media exposure, have better connections to institutional investors, and receive more internal support from their employers. Additional evidence suggests that analysts’ physical appearance per se at least partly explains our findings. Overall, our study demonstrates that physical attractiveness has a profound impact on the job performance and information access of sell-side financial analysts.

This was also a China-focused project, but this Journal of Accounting Research paper found similar results for the US sellside.

High scores for apparent “trustworthiness”, “dominance” and “attractiveness” correlated with better recommendations — probably due to greater management access, seemingly the main selling point of analysts these days — with a few interesting caveats.

While female analysts on the whole provided better forecasts than male analysts, women that scored high on dominance or attractiveness were on average less accurate than their male counterparts.

There was also a stark gender disparity when it came to inclusion in Institutional Investor’s All-Star rankings:

As institutional clients and analyst peers vote on All-Star status, face impressions may influence selection. Consistent with this idea, we find a striking gender difference in the face impression associations: high [dominance] increases All-Star status likelihood by 25.4% for male analysts but reduces it by a whopping 67.7% for female analysts. The perception of higher masculinity as indicated by a high [dominance] score violates the female stereotype, which Oh et al. [2019, 2020] suggest dominant-looking female analysts are perceived as less likable and thus less likely to be voted an All-Star. The stark difference in the [dominance] effect between female and male analysts for forecast accuracy and career outcomes suggests the possible presence of gender discrimination in the financial analyst labor market.

Which sadly isn’t exactly a surprise. Still, the conclusion from this growing body of research is that ugly beta nerds will inherit the earth.