Global hedge funds need to push for more greater gender and ethnic diversity and promote more inclusivity if they are to appeal to asset owners, attract skilled executives and improve their performance.
Those are the suggestons of a new study by the Alternative investment Management Association (Aima) with the support of consultancy EY.
The report, called ‘The Alternatives’, was released on Wednesday (November 13) and aims to offer “a practical guide to how hedge fund firms, large and small, can improve diversity and inclusion”. It was based on in-depth interviews with over 12 pioneers of diversity and inclusion (D&I) around the globe in hedge funds, plus research into how funds have so far promoted it.
Why should they do so? Because, as the study notes, “once diverse staff are in the firm, there is a significant amount of research that indicates they help improve decision-making”.
Expanding the gender and backgrounds of people that are hired by companies helps to promote a greater diversity of ideas, experience and perspectives. More prosaically, it it also makes hedge funds more attractive partners for end-investors, according to the study.
“Investors are also paying close attention to the D&I practices of the firms to which they allocate,” it said. “Institutional investors have many reasons for this focus, including a belief that diversity and inclusion can lead to better decision making and therefore overall performance by countering the risk of groupthink.”
Effie Vasilopoulos, a Hong Kong-based partner at law firm Sidley Austin, which works with many Asian hedge funds, said this is an important point .
"If institutional investors increased their focus on allocating capital to managers that are more diverse and inclusive, the hedge fund industry would also evolve more rapidly to meet this demand," she told AsianInvestor. "Investors have the power to drive a meaningful cultural change in the governance of the industry."
She added that, in her experience, diversity plays a positive role in hedge funds.
"In the last couple of years I have been very excited to help launch a number of hedge fund managers whose chief executive and key executive team members are women,” she told AsianInvestor. “I have seen these launches outperform the general market and drive highly innovative products and investment strategies in the process.”
Yet despite the potential benefits of strong diversity, the study noted that hedge funds often struggle to build such diversity.
“For an industry that prides itself on providing alternatives, the hedge fund industry is still overwhelmingly homogenous in demographic terms … in most jurisdictions, hedge fund firms are staffed by men, generally drawn from the socioeconomic elite and the ethnic majority.”
HONG KONG DIVERSITY
Perhaps surprisingly, Hong Kong’s hedge funds appear to have a slightly better gender inclusion rate than other regions.
The study cited a paper by alternative data provider Preqin about Women in Hedge Funds, which estimated that women represent 18% of an average hedge fund’s investment staff in Hong Kong, compared with 12% in the US and a global average of 10%. No data exists covering the number of LGBTQ individuals in the industry.
Asia-based service providers to the industry agree that there has been is a gradual influx of women into the sector in Asia. However, not all of this has been into the investing department.
“On the operations side I’m seeing more women secure senior roles such as [chief operating officer or chief financial officer],” noted Michael Langton, head of sales and outsourced services for Asia Pacific at software and fund services provider Enfusion. “[But] for the front-office investment side, I haven’t seen a massive uptick in female hedge fund managers, despite evidence showing [that having them contributes to] persistent peer outperformance.”
“In an Asia context, there is a relative scarcity of women in senior trading and COO roles; there are much larger numbers of women in investor relations and client-facing roles, added Vasilopoulos. “In the quantitative based and systematised strategy area that is trending strongly in the sector at the moment, there is almost a complete absence of women in key senior roles.”
In the short term, that sort of imbalance may well matter less in terms of outright performance than in perception, particularly when more asset owners are weighing environmental, social and governance principles in their partners.
“It may not matter whether individual firms believe in the substantial research on the benefits of D&I,” the study noted. “Their investors and regulators are increasingly convinced.”
HOW TO BUILD A DIVERSE AND INCLUSIVE TEAM
The Aima and EY study offered 45 separate actions that hedge funds can take to improve their diversity and inclusion. This ranged from creating a diversity and inclusive initiative to raise awareness in the company and senior leadership, then embedding these intentions in the culture of the firm.
Further steps include gathering data on the current D&I status of the hedge fund firm, potentially setting formal goals or quotas, and adopting anti-bullying or discrimination policies.
That’s just the beginning. From there firms have to consider whether to hire members who best fit into teams rather than as individuals, which requires determining the correct mixture of skills and personalities. And once the résumés roll in, the study suggested removing names, gender and addresses to help eliminate unconscious bias.
Further steps, like structured interviews and creating hiring panels, were suggested at the interviewing stage.
Once an array of more diverse team members are on board, arranging regular anonymous surveys of the corporate culture, sponsoring affinity groups and being aware of minority group holidays and events are all sensible steps to take, the study suggested.
Mentoring and mental health wellbeing and support are also recommended to help improve inclusion and prevent burnout.