Hedge fund managers’ concern about their reputations can influence their investment strategies according to the working paper “Nickels versus Black Swans: Reputation, Trading Strategies and Asset Prices” by assistant professor of finance Hongjun Yan and doctoral candidate Steven Malliaris of the Yale School of Management.

This finding helps explain why “nickel” strategies are popular, even when they offer low expected returns. Nickel strategies are those that earn small positive returns most of the time but occasionally suffer huge losses; black swan strategies are the opposite, generating small losses most of the time but occasionally leading to spectacular loss-erasing profits. In a rough estimate, Yan and Malliaris found that approximately 40% of hedge fund assets are invested in nickel strategies, while only 0.6% are in black swan strategies.

Nickels versus Black Swans: Reputation, Trading Strategies and Asset Prices - Free Legal Forms