How women-led hedge fund firms can gain value

This article first appeared on Hedgeweek.

This hedge fund industry is dominated by men, with women and minorities controlling only a small fraction of US-based assets.

Some financial observers say fixing this gender imbalance is long overdue. They bolster their argument with data showing hedge funds run by women have performed well in recent years, including during the pandemic, when they out-performed those managed by men.

“Embracing a culture of inclusion and diversity in an organisation is not just the right thing to do,” says Allison Nolan, founder and managing director of Athena International Management Limited and author of the upcoming book, Madam Chair, about how women are transforming the hedge fund industry and why more women are needed.

“The benefits of gender balance within investment management firms are clear and irrefutable. Not only does gender diversity and inclusion within a firm improve decision-making and enhance the business culture, but evidence shows that it is sound business sense, creating value and improving returns.”

Studies reveal that part of the reason female investors fare well compared to men is due to behavioural differentiators, such as showing more discipline than men in investing decisions, being less overconfident and trading less, and focusing more on protecting investments from risk.

Nolan says investors increasingly demand that hedge fund firms demonstrate a commitment to diversity, equity, and inclusion. She suggests actions hedge fund firms can take to improve diversity and inclusion, and enhance the industry:

Lead the culture. “Rather than having diversity as a matter for the HR department,” Nolan says, “the firm’s principals should treat diversity and inclusion as a strategic initiative and an imperative part of the overall business plan. Senior management should set a clear intention, with D&I goals becoming part of the firm’s mission, fundamental values and culture.”

Start early. Nolan says firms should, at the minimum, require a diverse slate of candidates to be considered when hiring for open positions. “It is a great idea to start earlier on in the process and create college-level internships encouraging applications from minority groups,” she says. “Overall, make diversity an ingrained part of the hiring process, creating diversity goals as well as policies and procedures around the onboarding process.”

Identify unconscious bias: “Negative bias can be subtle, and sometimes individuals are completely oblivious to the underlying current of bias in their behavior and the language and phrases they use,” Nolan says. “The first step is awareness. There are illuminating tools for identifying unconscious bias like the implicit association test on social attitudes designed by Harvard University.”

Undertake mentoring and sponsorship: “If the firm is a small start-up, or there is a lack of senior women, explore the possibility of cross-firm mentoring programs,” Nolan says. “To assist on every level, reverse mentoring should be considered. Pairing younger employees with executive team members to mentor them on various topics of strategic and cultural relevance will educate and transform the mindset of the whole firm.”

Emphasise next-level success. This action pertains to retaining and advancing women in the business structure. “Women need to see a viable path towards career progression laying the foundation for success,” Nolan says. “There should be a focus on the promotion process and transparency to ensure that women have equal opportunities for advancement.”

Give female representation on the board: Firms can enhance gender diversity by having a skilled professional female independent director serving on the board of directors and advisory boards of fund structures. “This can boost investor perceptions around inclusion as well as shift perspectives,” Nolan says.

“Diversity, particularly gender diversity, is still one of this industry’s biggest challenges,” Nolan says. “Women continue to show the value they bring to the table, and to leave them out of leadership is leaving money on the table.”