Saturday, January 19, 2013

The Case for Diversity: Hire Women to Manage Money

The Case for Diversity: Hire Women to Manage Money
You may have seen the headlines heralding the triumph of female hedge fund managers, as this story has been widely circulated in the financial press.  Yahoo Finance trumpeted, “Female Hedge Fund Managers Ruled the Markets in 2012.”  The article notes that female-owned hedge funds returned 8.95% in 2012 versus a global hedge fund index, which posted a 2.69% return.  The achievement is probably meaningless, as I’ll discuss in a moment.  However, the story is important.

International JV (1995)

Rothstein Kass, a consulting firm, periodically publishes surveys on women in alternative investments[1] and posts the results of a benchmark that tracks the performance of women-owned hedge funds.  The consulting report draws attention to the ongoing problem that women play a ridiculously minor role in hedge funds, venture capital, and private equity.  This is especially true when it comes to positions of power.  According to the survey, women only own 17% of hedge funds, and most of those funds are small.  The ownership percentages are even worse in private equity (13%) and venture capital (12%).  Within alternative investment firms, women tend to be better represented in marketing and back office functions.

As I’ve discussed in numerous posts, alternative money managers are a huge influence on our capital markets and our political process.  Blackstone, KKR, Carlyle, Fortress, and the other “big boys” have the clout.  Women can only gain clout in the alternative space, if investors are willing to hire them.  Perhaps, RK’s survey will nudge the public pension plans to more actively seek out women as they hire managers.

Unfortunately, the wide disparity in returns achieved by women-owned hedge funds isn’t meaningful.  As the survey’s author points out, most of the hedge funds are small, and smaller funds tend to perform a bit better than large ones.  In addition, we’re comparing a lot of different investment styles because hedge funds comprise a wide array of strategies.  So the headline numbers involve a comparison of apples and oranges or maybe even fruits and vegetables.  And of course, RK’s data as well as the broad hedge fund universe are all self-reported data.  As a result the data is full of biases.  Nonetheless, the headline number grabs your attention and that is a good thing.

There is some evidence that women outperform men as investors.  Various academic studies looking at retail and institutional investors have shown that men tend to trade too much and exhibit great levels of over-confidence when compared to women.  However, the performance differences in those studies aren’t as large as 9% versus 2.7%.

When I managed the pension plan for North Carolina, we made concerted efforts to hire women and minorities.  It was not an easy task, given the white-male domination of the business.  In part we wanted to provide opportunities to groups that had not been given a chance.  However, a large part of the motivation was self-serving.  A portfolio managed by a bunch of white, male, Harvard educated MBAs lacks diversity, and a lack of diversity represents risk.  Hiring women and minorities is an excellent way to bring different perspectives to the management of your money.


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