By measuring the number of Confucian temples and academies within a 100-kilometer radius of a hedge fund’s location the authors of the paper highlighted today believe they’ve been able to isolate a beneficial ‘Confucian influence’ on investment performance.
Specifically it’s the principle of ‘Doctrine of the Mean’ i.e. progress of a middle way in all things the researchers believe that’s most influencing manager’s decision making (there’s more here Doctrine of the Mean).
In conclusion they note “..hedge funds with a stronger Confucian cultural impact take on less investment risk and deliver higher returns and alphas, resulting in elevated Sharpe ratios. [The effect] is more pronounced at funds located in regions with lower levels of marketization and restricted openness, where formal institutions are lacking.”
The methodology appears sound but, personally, I’m suspicious of the interpretation of economic outcomes that use cultural or religious starting points. I’m not sure that Catholic’s are generally lazy, Calvinists especially self reliant or that Judaism promotes entrepreneurship whilst Islam stifles creativity (and so on).
It may be what the researchers have uncovered is nothing more than a geographical bias or self-assortment and that folk in regions where temperance is admired happen also to make better investment decisions. Which would make intuitive sense. That temperance preference may also account for the extra temples and academies. Causality, correlation, and all that.
Bottom line, with or without Confucius peering over manager’s shoulders, capital managed by sensible folk not given to excess is more likely to be preserved than that looked after by colorful mavericks. Which we knew, but some simple homilies are worth repeating whatever the prompt.
You can read the work in full via this link The Confucian Cultural Impact on Hedge Fund Performance.
Happy Sunday.