Wall Street is filled with characters and “personality”. I have met my share, but a key question is whether some of these personality extremes actually lead to better returns. I have written about this in my posting The Wisdom of Psychopaths and Trading. Some have suggested that the characteristics of psychopaths if directed toward good goals may lead to successful outcomes. The core idea is that a lack of empathy or emotion found in psychopaths is actually good for some jobs. Certainly, there is a strong strain of thinking that trading should be without emotion. Hence, personality characteristics such as less emotion or empathy may be good for return generation. You just may not want to have them as your boss.

However, the data suggest that having certain personality traits may actually hinder hedge fund performance. Research published last year that classifies the personality traits of hedge fund managers and then followed their returns shows that psychopaths generate lower returns and narcissists have lower risk-adjusted returns. (See Hedge Fund Managers With Psychopathic Tendencies Make for Worse Investors.) While I have not looked closely at all of the data, it suggests a nuanced story about personality and return generation. Perhaps negative personality traits come out of the woodwork when there are pressures at the extreme, or the psychopath who has to work in a team or with others proves to be a hindrance to return generation.

It does suggest that effective due diligence should go beyond the numbers and make an assessment about the personality and character of the hedge fund manager. There is a critical need for references and background checks. However, we know that psychopaths and narcissists are not always easy to spot given the limited time spent with a hedge fund manager in due diligence.

There is no question that likability is an important trait for raising money for asset management firms, but we also know that high returns are forgiving for aberrant personalities. After a decline in returns or firm failure, many will bring up personality issues, but that does not help when doing due diligence.

Nevertheless, the classic test of having a meal with managers still seems to work. It is time consuming, but you learn a lot about a person especially when you see them interact with serving staff. But, is rudeness a disqualification for allocation? I would say yes, but you will be cutting a large universe of managers.