What’s keeping women on the margins? Mostly bias, culture and a harsh business climate – but not always in ways you’d expect, write Institutional Investor’s Amy Poster and Frances Denmark. This is part two in a series – catch up on part one.
Any discussion of women in hedge funds has to touch on performance. One of the most widely cited statistics used to tout the ability of women managers and by implication to allege bias against them in the industry are the performance indexes published by Chicago-based Hedge Fund Research. The company’s Women Index, which tracks 61 single-manager funds run or owned by women, has shown average annual returns of 2.1 percent since 2007, almost double the 1.1 percent returns posted by the HFRI Fund Weighted Composite Index, the firm’s broad industry benchmark. However, those numbers may not be everything they seem.
Take a 2015 study by professors Rajesh Aggarwal and Nicole Boyson of Northeastern University’s D’Amore McKim School of Business, based in Boston. They debunked the received wisdom of the HFR numbers and came to some other intriguing conclusions. Their study, commissioned by PAAMCO CEO Buchan, looked at the performance of 9,520 hedge funds where the sex of the portfolio managers was known, over the period of 1994 to 2013. The sample was overwhelmingly male: fully 95.4 percent of the funds had only male portfolio managers. Just 244 funds, or 2.6 percent of those surveyed, had women-only managers; the remainder were mixed.
By stripping out the survivorship bias inherent in a comparison of the HFR indexes, Aggarwal and Boyson found no significant difference in performance between the genders. But the professors also found that female-only funds were smaller than their male counterparts. Assets under management of extant funds with only female portfolio managers averaged $151 million, compared with $222 million for male-managed funds; women-run funds that failed had $95 million, on average, compared with $117 million for their male equivalents. And the performance of the surviving funds? Women-managed funds that survived generated average annual returns of nearly 7.5 percent, compared with 6.7 percent for funds run by men. “Our results suggest that there are no inherent differences in skill between female and male managers, but that only the best performing female managers manage to survive”, the professors wrote.
The small number and sizes of women-managed funds are striking considering the demonstrated ability of female managers, suggesting that the industry is ignoring a lot of potential, Aggarwal says.
“There is currently no evidence that the pipeline for female portfolio managers is increasing”, he adds. “Pension funds, endowments and institutional investors have a blind spot when it comes to female managers. They are simply overlooking talent.”
Can women help women get to the top?
Women-owned funds do not seem to fare any better gaining entry into foundation and endowment portfolios. Trusted Insight, a leading syndication platform for alternatives, published a September 2015 report that identified the top 30 female CIOs or directors in university foundations, which managed a collective $136 billion. With women running so many endowments, one might expect a greater tendency to allocate to female managers, but that apparently is not the case. “Most endowments and foundations are quite agnostic in their search for investment managers who can add value to their portfolios”, says Sandra Urie, who is due to step down as chairman and CEO of Boston-based consulting firm Cambridge Associates at the start of July. “They seek talent, experience and expertise wherever it may reside, and while most do not explicitly focus on woman- and/or minority-owned firms, they also do not exclude them.”
Hedge fund allocators say funds of funds and family offices offer the best bet for seeding rising women hedge fund managers. PAAMCO’s Buchan agrees, adding, “Women need to expand the geographic scope of where to look for capital and at sources that look at you as a human being.”
Female managers can’t expect any favours from female allocators, though. “The first priority for women managers is delivering better-than-average returns”, says Susan Webb, co-founder and CIO of Appomattox Advisory, a woman-owned New York fund-of-funds and advisory firm. “You have to make money. They have to be able to execute the strategy. We are agnostic to whether a manager is male or female.”
Women also can turn to specialty seeding firms to get a start, as Quadratic Capital did. Jason Lamin, a former consultant to the Teacher Retirement System of Texas and founder of New York consulting firm Lenox Park, is a big proponent of seeding.
“The long capital-raising cycle is highly inefficient and distracts the portfolio manager from what she does best investing, he explains. Seeding provides institutional legitimacy and operational infrastructure to new firms, allowing managers to scale up quickly.”
Yet seeding does not come without risks. Many managers balk at the equity stakes seeders demand, and the seed firm’s values may not always align with those of the founders. “We opted to raise capital by ourselves instead of a seeder, as we wanted to maintain the core values we have as a team”, says Matarin Capital’s Gilbert. Concessions to seeders can make it harder for firms to raise additional capital later on, cautions UBS OConnors Fitzpatrick. “Preferential liquidity combined with preferential fees to the seed investor can ultimately be deterrents to a broader successful capital raise”, she says.
Sharing experience to find success
Some women hedge fund managers are drawing on their own experiences to try to pave the way for future generations.
Victoria Hart’s career journey began in 1996 with a BS in chemistry from Wellesley College. She used that degree to get hired as a chemicals and health care analyst at consulting firm Arthur D. Little, followed by stints on Wall Street as an investment banking analyst at the former Donaldson, Lufkin & Jenrette; Deutsche Bank; Citigroup; and Merrill Lynch & Co., adding telecommunications, technology and media to her sector knowledge. Along the way she picked up an MBA from Columbia Business School.
In 2011, Hart joined East Side Capital, a New York-based long-short hedge fund firm backed by George Soros. After two years she was ready to open her own shop, Pinnacle View Capital, in New York.
“I decided to launch my own hedge fund given the breadth of my involvement in the markets, as I have a wider lens and more tools to evaluate investments”, Hart says. “It was a good time, as I had 16 years of diverse experience yet was still young enough to have the stamina for the challenges of starting up a hedge fund.”
With less than $150 million in assets under management at Pinnacle today, Hart knows full well the trials of capital raising as an emerging woman manager, but the operational burden of running her own shop took her by surprise. “It’s important to align yourself with the right service providers, as some can be more strategic as you grow, whereas the wrong ones will deplete your financial resources more quickly with little value add”, she says.
Three years after Pinnacle’s launch and with no prominent seeder behind her, Hart realized how vital business networks are. Frustrated by the lack of support shed encountered, she founded Seven Degrees of Women in Finance, an invitation-only networking group for female fund managers. Today the group has almost 200 members.
This story continues next week on GAIM Live, exploring whether networks like Hart’s can actually help women get ahead. This article originally appeared in Institutional Investor – read it in full.