“Both poker and investing are games of incomplete information. You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.”
-David Einhorn, Founder and President of Greenlight Capital
Several notable hedge fund managers, including Carl Icahn, Steve Cohen, and Jim Simons, have credited poker as an aid in developing their investing strategies.
Some of these managers have even tested their hand at professional poker tournaments throughout the years. Here are a few more examples of managers with a close affinity to the game:
Boaz Weinstein - Saba Capital Management
Dan Shak - SHK Asset Management
David Einhorn - Greenlight Capital
Jeff Yass - Susquehanna
The prevailing theme begs the question: Can playing poker make you a better investor?
Hedge Fund Hold ‘em
According to Hedge Fund Hold 'em, a study published in the Journal of Financial Markets, fund managers who had won at least one poker tournament had an average monthly raw return of 0.67% compared to 0.58% for managers who had never won a tournament. The study analyzed data from 3,237 funds ran by 2,461 managers from 2001 to 2015.
Poker tournament winning managers also had alpha, or the amount of outperformance compared to a benchmark index, of 0.34% compared to 0.23% for non-winning managers. Winning managers had an average fund lifespan of 3.72 years compared to 3.02 years for the non-winners.
Success at publicized gambling tournaments inevitably leads to increased public awareness. A manager’s average monthly inflows the year following a tournament win were 1.2% to 1.8% higher when compared to non-winning managers. Managers who were able to take home a win at the highly publicized World Series of Poker or World Poker Tour saw monthly net inflows 1.9% to 3.5% higher.
With more money comes more problems. According to the study, while average returns remained consistent following a tournament win, alpha decreased significantly. The authors suggest that this could be the result of decreasing returns to scale or investments in index constituents using the new capital, but not anything directly related to poker.
Unfortunately, the study doesn’t go into detail on a possible correlation between fund managers with experience in poker and high returns, as well as alpha. There isn’t a study out there that details this to the best of my knowledge.
The Similarities Between Investing and Poker
Poker is a centuries-old game that became a household name in the U.S. following the creation of the World Series of Poker in the 1970s. To excel at the game, a player must demonstrate a sustained level of emotional control, risk management, and patience. Sound familiar?
Emotional control starts as soon as the dealer begins dealing the cards. A player must not let the outcomes of previous rounds influence the outcome of the current round. With previous losses, that can mean feelings of frustration, anger, and fear. In investing, this process echoes the act of staying calm during periods of market downturns or remaining calm following a series of bad investments.
After examining the cards, a player must make a timely decision guided by an assessment of risk management to either fold and exit the round or stay in by placing a bet. Folding could mean realizing a loss if the player is the big or small blind, which is similar to knowing when to sell out on a losing investment. Staying in would mean betting more money, the sum of which would be affected by the perceived strength of the player’s cards, or the information available upfront. A player must ultimately make this decision with incomplete information, as they don’t know what the opposing players have in store. This reflects the uncertainty of the market.
Patience comes into play while waiting for a good hand, which gives a player the confidence to bet big, much like holding an investment for the long-term or when an attractive investment opportunity presents itself.
“The evidence suggests poker-winning managers are more patient. The average portfolio turnover is 2.7% lower for poker-winning managers than for their peers.”
-Hedge Fund Hold ‘em
The iconic game also has similarities to trading options and sports betting, according to Susquehanna co-founder Jeff Yass. Susquehanna, one of the largest option market makers in the U.S., was actually funded in part by Yass’ winnings from poker and horse race betting.
“All of sports betting, all of playing poker, and all of options trading is making sure you’re betting against someone you’re smarter than. If you’re not asking yourself, am I the sucker, or am I the [bait], you get arrogant and you get crushed.”
-Jeff Yass
Even more similarities exist, like bluffing, which can relate to a company who provides unrealistic forecasts. These compelling parallels add support to the belief that poker and investing share not only common ground but also the potential for mutual benefit.
Hedge Vision - Institutional Insights
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great take, thank you!