Is gender a factor in fund performance?

February 17, 2015

Is gender a factor in fund performance?

Studies indicate outperformance of female hedge fund managers
LONDON, ENGLAND - OCTOBER 31: (L-R) Dr Norraesch Mohamed, Chairman, WIEF Businesswoman Network, Malaysia, Azeemeh Zaheer, Head of institutional relationships & wealth Management, Gatehouse Bank, Helena Morrisey CBE, CEO Newton Investment Management UK and Philisiwe M Mthethwa CEO National Empowerment Fund, RSA present at the World Islamic Economic Forum at ExCel on October 31, 2013 in London, England. (Photo by Matthew Lloyd/Getty Images for 9th World Islamic Economic Forum)

“You will never see as many great women investors or traders as men. Period. End of story,” hedge fund legend Paul Tudor Jones declared in 2013, in his now infamous exposition on how breastfeeding mothers could not simultaneously hold an interest in following the market or analysing a stock.

So why, then, are investors increasingly keen to put their money with female hedge fund managers?

Many US public pension funds — some of the largest institutional investors in the world — have made finding women-run hedge funds a priority, partly for public policy reasons. But the phenomenon goes beyond institutional investors whose actions are in the political spotlight.

The investment case for putting money with female managers has more to do with portfolio diversification than it does with promoting diversity.

After a financial crisis in which asset classes all seemed to move in lock-step, and when hedge funds did not provide the uncorrelated returns that were advertised, female managers might do things just differently enough to cushion a portfolio next time around.

The evidence for this has been building over time. A study by consultants Rothstein Kass in June 2013 found that funds majority-owned by women had outpaced the hedge fund industry as a whole in the preceding six-and-a-half years, returning 6 per cent compared with a loss of 1.1 per cent for the industry. A later study found female hedge fund managers outperformed men over 2013 as a whole. A new calculation for 2014 is due shortly.

It is too early to be sure of the statistical significance. This is a small data set. There are just 125 women-run funds anywhere in the world reporting returns to industry databases.

It is notable, however, that the outperformance seems to be strongest around the period of the financial crisis. Behavioural finance studies suggest that female investors are both more risk-averse and more likely to stick with their investment choices through turbulence, which might provide a clue as to why women-run funds avoided the worst of the crash and benefited disproportionately from the rebound.

One female manager of a multibillion-dollar hedge fund thinks her gender is a distinct advantage.

“Markets dominated by male investors are why ‘min vol’ strategies work so consistently,” she says, wryly. “Researchers have proven we think about risk and solve problems differently than men. I like my odds given a differentiated perspective in an industry that tends to have a very homogeneous group of participants.”

Others like Maria Vassalou, manager of the PWP Global Macro Fund at Perella Weinberg, are not so sure about ascribing their outperformance to the fact that they are a woman, but Ms Vassalou is confident that if female managers are outperforming their male peers, this is something that will soon get noticed.

“Investors should invest with the best managers, just as they would hire the best person for a job,” she said. “This is an industry which is driven by performance, and numbers are gender-blind. So, I think it’s a great place for women to compete.”

The good news is that the data set is likely to expand rapidly, as more money is there for the taking by women who set up their own funds. Meredith Jones, a consultant, counts 26 US states whose pension funds are actively seeking to allocate to “emerging managers”, and many of those programmes are explicitly targeted at finding female talent. To qualify, hedge funds usually have to show that they are 51 per cent-owned by a woman, or women, with female decision-makers. Individual investors can be more flexible in choosing funds that have women in the most senior investment roles.

One of the most prominent female hedge fund managers, Leda Braga, whose $9bn computer-driven trading firm Systematica Investments was spun out of BlueCrest late last year, told the FT this month that she thought human managers — male and female — could ultimately be replaced by algorithms.

Until then, investors will have to continue to carefully weigh the human characteristics of their flesh and blood managers, and the need for diversification argues strongly for considering women-run hedge funds in the mix.

For women rising through the industry, investors’ desire to tap into the potentially different investment styles of female managers could make this an auspicious time. That is not in any way to underestimate the challenges posed by Paul Tudor Jones-style attitudes across the industry, especially at the hiring stage, but the most senior female managers may find they have marketing cache as well as performance chops. That will help level the playing field, and give the industry a fighting chance of proving Mr Tudor Jones wrong.