Kim Pejnenburg (Tilburg University)

Inherited Risk Preferences of Money Managers

Joint with ESCP Business School

Abstract: We examine how inherited risk preferences shape U.S. fund managers’ risk-taking and performance. We infer inherited risk preferences based on the cultural origin of each fund manager. Our results indicate that managers with ancestral roots in more risk-tolerant cultures take on more risk, as measured by greater return volatility, higher market betas, and larger tracking errors. This greater risk-taking generates higher returns in bull markets but lower returns in bear markets. Investors reward risk-tolerant managers with greater inflows. However, we find that these managers achieve lower “alpha” than risk-averse managers once we account for risk. Overall, our results point to capital misallocation in the mutual fund industry.