Dr. Roy Zuckerman
Trust and Investment Management: The Effects of
Manager Trustworthiness on Hedge Fund Investments
This paper studies the effect of trust or perceived manager trustworthiness on hedge fund investment. 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 addition, we find that more "trustworthy" managers are also more likely to survive. We find no evidence that perceived trustworthiness predicts actual manager skill. In fact, managers who are perceived as
more trustworthy perform worse and generate lower risk-adjusted returns when compared to those who are perceived as less trustworthy. We attribute this phenomenon to over-investment with "trustworthy" managers caused by an investor bias. Our study joins the growing literature discussing the role of trust in economic outcomes, and suggests that trust could play a major role in investment decisions, even for sophisticated investor sets.