Men too ‘hormonal’ when trading as women produce better returns

When it comes to investing, the cliché that men are from Mars and women are from Venus has more than a little truth in it. Despite (or perhaps because of) being less interested, less confident and more risk-averse when it comes to investing matters, women routinely enjoy better returns. In the male-dominated hedge fund universe, the notion of female outperformance may raise an eyebrow or two.

"You will never see as many great women investors or traders as men, period, end of story," billionaire investor Paul Tudor Jones said last year. Having a child is a "killer", he said. "As soon as that baby's lips touched that girl's bosom, forget it."

The stats say otherwise. Women-run hedge funds returned 9.8 per cent last year compared to 6.13 per cent for the HFRX Global Hedge Fund Index. And last year wasn’t a one-off: hedge funds run by women returned 6 per cent between 2007 and mid-2013 compared to a 1.1 per cent loss for the global hedge fund index. And between 2000 and 2009, female hedge fund managers returned 9 per cent annually compared to 5.82 per cent for their male counterparts.

Some caveats spring to mind. The noughties was a lousy decade for equities, a factor that would favour investors who eschewed risk. Women managers may not do so well in a more bullish environment, a sceptic might say.

Additionally, the percentage of hedge funds run by women is tiny, leading to two problems. The sample size is small, meaning it may be a statistical fluke. And the glass ceiling means those who do head their funds may be the very cream of the crop.

Overtrading
However, female outperformance is not confined to the hedge fund world, and nor is it limited to the noughties. Boys Will be Boys: Gender, Overconfidence, and Common Stock Investment, a famous study carried out by behavioural finance experts Brad Barber and Terrance Odean, examined 35,000 discount brokerage accounts between 1991 and 1997. Overall, men traded 45 per cent more often than women and earned 1.4 per cent less annually.

The researchers correctly hypothesised that the difference would be even greater among single men, as couples would likely influence each other’s investment decisions. Sure enough, single men traded 67 per cent more often than single women, and earned 2.3 per cent less annually.

Another study carried out by University of Exeter researchers analysed 80,000 trades made by male and female company directors in Britain. The market responded better in the short term to men’s buys, shares gaining an average of 1.55 per cent over the following 20 days, compared to 0.88 per cent for women. One year later, however, the women directors’ buys proved much better, averaging monthly gains of 0.68 per cent, compared to 0.37 per cent for men.

US index fund giant Vanguard found its women clients earned 5 per cent more than men between 2005 and 2010, partly due to their calmer handling of the global financial crisis of 2008/09. Then, men were 10 per cent more likely to sell their stocks than women, whose portfolios were further protected by their higher allocation of bonds.

A 2005 Merrill Lynch study found that women were less interested and knowledgeable on investing matters than men. However, they made fewer mistakes, and were less likely to repeat those they did make. Some 32 per cent of men were likely to allocate too much to one investment, compared to 23 per cent of women, while 24 per cent of men were likely to buy a “hot” investment without carrying out any research, compared to just 13 per cent of women.

Of those who made an investment decision without regard for tax consequences, 68 per cent of men did it again, compared to 47 per cent of women.

As for those who bought a stock without doing any research, 63 per cent of men did it again, compared to 47 per cent of women.

The same picture emerged from a 2011 Barclays and Ledbury Research report. Women were less likely to describe themselves as knowledgeable investors, and accordingly were more likely to do more research before investing. Women were "more likely to make money as investors in the financial markets, mostly because they didn't take as many risks as men", the report concluded. "Usually, they buy and hold. Women trade this way because they are not very confident or overconfident as men."

Most of these studies find women outperform not because of superior stock-picking ability; they simply screw up less. Men take on too much risk. They also trade too much, partly out of overconfidence in their ability to divine market swings, and partly because of thrill-seeking desires.

British spread-betting firm IG Index, for example, last year estimated that fewer than 10 per cent of its 92,000 active clients were women. Similarly, a 2012/13 survey by Prudential found 40 per cent of its male clients enjoyed the “sport” of investing, compared to 22 per cent of women.

Studies show women are less likely to break amber traffic lights, less likely to smoke, more likely to wear seat belts, more likely to floss their teeth – you get the picture.

It’s little surprise the same differences would manifest themselves in investment behaviour.

Lehman Sisters?
Heightened risk-taking, overconfidence, and alpha-male investing behaviour in general has come under the spotlight more since the global financial crisis erupted in 2008, with the argument made that the mess may have been avoided if Lehman Brothers had been Lehman Sisters. In Britain, the parliamentary commission on banking standards report found the culture on the trading floor is "overwhelmingly male", and argued that more women on the trading floor would be "beneficial to banks".

Those findings echo the work of Cambridge neuroscientist Dr John Coates, a former Wall Street trader. Men are "more hormonal than women" when it comes to trading, says Coates, author of The Hour Between Dog and Wolf: Risk-taking, Gut Feelings and the Biology of Boom and Bust. His experiments have found a feedback loop between testosterone and trading success that dramatically lowers men's fear of risk, leading to irrational exuberance and eventually to market meltdowns.

Similarly, “stress hormones linger in our brains” after a losing streak, he writes, “promoting a pathological risk aversion”. This irrational exuberance or pessimism can “destabilise the financial markets and wreak havoc on the wider economy”.

Policymakers should look for financial companies to embrace measures that promote less overtrading, less volatility and better long-term planning, says Coates, namely “a financial community with a more even balance between men and women”.

Some, like Paul Tudor Jones, might disagree, but the disconnect between men and women’s investing behaviour supports Coates’ thesis that we “could not possibly do any worse than the system we have now”.