When traders go into marital meltdown

If you're a trader and your marriage is breaking down, you may want to step back from the markets. On the other hand, maybe your marriage is breaking down because you're a trader.

Paul Tudor Jones, founder of Tudor Investment Corporation, said this week that when a hedge fund manager is going through divorce, you can immediately deduct 10-20% from his returns as a result of "emotional distraction". This was seconded by Taylor O'Malley, chief risk officer at Balyasny Asset Management, who told attendees at the Eurohedge Summit in Paris yesterday that he sometimes cuts portfolio managers' capital in half if they're having marital problems, on the grounds that the emotional distraction leads to a lack of focus.

When divorce disables trading ability 

Danny Kessler, chief executive of MET traders, a financial futures group specializing in proprietary trading, said he's witnessed the damage that a messy divorce can do to traders' performance.

'Divorce makes people trade their P&L [profit and loss]," said Kessler. "Instead of saying I'll buy that security at 99 and hold it until it reaches 101, they buy it at 99 and decide to hold it until they've made $100k. They trade their P&L figure rather than their position and stop making rational decisions.

"I suspect this is because they know they're in danger of losing half their net wealth and are trying to recoup that," he added.

One hedge fund manager who's been through a difficult divorce confirmed that it's hard to trade whilst dealing with family breakdown. "Trading is a 24-7 job. You need to be fully focused all the time and if you're going through emotional pain, it's difficult to look at the market objectively," he said.

When trading leads to egomania and egomania leads to divorce 

However, the narrative may not be that simple. While divorce makes it difficult to trade effectively, there are also good reasons why traders will be particularly prone to getting divorced.

Traders need to be egomaniacs, said David Tuckett, a visiting professor at University College London and leading researcher in the role of emotions in economics. Successful trading is mostly about luck, argued Tuckett, but top traders will build a 'conviction narrative' which tells them that they have a system that allows them to beat the market. "Conviction is central to trading," said Tuckett. "You need to believe that you have an approach which is rational and allows you to perform where other people can't."  

The spouses of successful traders need to accept their partner's unwavering conviction in their trading ability. If they don't, the trader will respond harshly, said Tuckett: "Traders identify any threat to their belief systems as extremely dangerous," he said.

In one sense, Tuckett said traders make extremely appealing partners. In another, they're intolerable egomaniacs. "There's a fine line between someone who is self-convinced, exciting and potent and someone who is self-convinced to a point at which it becomes hard to relate to them," said Tuckett. When traders cross that line, divorce is the result.

The divorced hedge fund trader said trading success can become all-consuming. "As you become more and more successful, you spend more and more time with the markets. At work you're seen as a hero and when you get home you're seen as the schmuck with his feet on the table. It becomes harder and harder to deal with."

Avoiding the divorce trap 

Traders can clearly avoid divorce by not getting married. John Hughes, the ex-UBS trader who now runs a betting website, said that when he was at UBS very few people on the floor were betrothed. "There weren't many people who were married - you're so committed to the market, that it causes problems. I got into trouble an awful lot with my girlfriend for not being fully switched off," he said.

Another is to take preemptive action to save your relationship. Greg Coffey, the 41 year old ex-GLG hedge fund trader, retired late last year in order to spend more time with his wife and children. Coffey's wife was said to have objected to his long working hours.

The good news is that traders who get divorced and who come out the other side may become more productive as a result of being inured to emotional pain. Jon Moulton, the private equity 'guru', said in 2008 that companies set up by entrepreneurs who'd been through one divorce delivered better returns than companies set up by entrepreneurs who hadn't been divorced at all. However, Moulton said returns plummeted once someone had been through two or more divorces because their private lives were too complex for them to be effective at work.