Hedge Funds Have a Missed Opportunity That Could Be Hurting Results

By November 23, 2018March 23rd, 2021No Comments

The hedge fund world is undergoing a period of profound change due to performance headwinds, pressure to lower fees, and increased competition from other alternative-asset classes. Savvy managers are going to great lengths to adapt. But most of the industry is overlooking one the biggest barriers to future success: our massive gender gap.

Less than 5% of the world’s 100 largest hedge funds are currently run by women, and women hold only 10% of portfolio-management and investment-team roles across the industry. This is evidence of a missed opportunity.

The HFRX Diversity Women index, which reflects returns linked to women-run hedge funds, has outperformed the HFRI Fund Weighted Composite index over the past three, five, and 10 years. While this shouldn’t be considered an indicator of how female managers will perform in the future, the results warrant exploration.

Numerous academic and industry-commissioned studies have found evidence of ways in which women’s approaches to investing diverge from men’s. The most notable ones include adhering more to analysis rather than instinct, prioritizing long-term returns over immediate gains, and generally trading securities less frequently.

As a female bankruptcy lawyer turned investor in distressed assets, I’ve experienced firsthand how increasing gender diversity can add value at a hedge fund or an alternative-investment manager. My approaches to areas such as analyzing securities, structuring trades and positions, and managing portfolio risk are often different from my colleagues. Specifically, I am comfortable relying on my analysis, as opposed to the consensus of the crowd. In the case of a security that didn’t reflect the risk of a key litigation in its pricing, but was increasing in price due to “copycat” trades, I took a contrary view and stood my ground. In an environment that is full of duplicative strategies and copycat trades, I know that my colleagues value the fresh perspectives that come from a variety of backgrounds and experiences.

I am not suggesting that women are universally more cautious and pragmatic than men when it comes to investing. What I believe it fair to hypothesize, however, is that hedge fund managers willing to increase the number of women in investing functions will be better positioned to pursue optimal risk-adjusted returns.

There are a few clear steps that firms could take immediately.

Rethinking Recruitment

Even though the number of college students pursuing finance and math degrees is close to evenly split along gender lines, most internships and entry-level jobs at hedge funds still belong to men. Firms can start leveling this out and identifying a larger pool of women investors by emulating what Silicon Valley is already successfully doing on college campuses.

Tech firms, ranging from Apple to, have reimagined how they strike a connection with tomorrow’s talent. Companies such as Apple have used their digital footprint to share stories, information, and social-media content about their culture and life in the industry. Others have sponsored hackathons and on-campus gamification experiences that replicate what a day in the life could be like. This type of communication has an inclusive, welcoming effect that is often lacking in the alternatives world.

Leading hedge funds could forge an ongoing dialogue with students about the appeal of a career in investing—whether through regional events, sponsorships, guest-lecturing programs, or hosting classes at their offices. We can’t expect young women to embrace our industry out of school if they don’t understand it or feel welcomed.

Creating the Right Infrastructure

Many firms have made great strides when it comes to recognizing that women, particularly mothers, require more workplace flexibility. It finally is no longer taboo to take full maternity leave, periodically work remotely, and sometimes maintain flexible hours. We need industry standards to ensure that women at hedge funds have access to this infrastructure and that their organizations fully support them in using it. Respected outfits such as the Managed Funds Association and Alternative Investment Management Association can help provide guidance for all firms.

Investing in Women

It is a difficult asset-gathering climate, but that doesn’t mean we should stop trying to increase access to capital for current and future women-run funds. Allocators of capital, ranging from funds of funds to public pensions, can play a critical role. Setting specific allocation targets for female managers, even if it’s only 20% over the next five to 10 years, will help ensure that women don’t remain perpetual outliers in the industry. We also need more programs like the ones supported by New York City Comptroller Scott Stringer. The Comptroller’s Diversity Working Group was formed in 2017 to identify opportunities for greater diversity among emerging and established investment managers hired by the city’s pension plans.

There is no silver bullet for increasing the number of women in our industry. But if we want a stronger and more diverse industry in the years to come, we must take meaningful and substantive steps today.

Cindy Chen Delano is a senior legal analyst for distressed investments at Whitebox Advisors, a global alternative-asset management firm.

Original Source: Barron’s