How to Improve Diversity in Your Hedge Fund?
Diversity and Inclusion (D&I) continues to be at the top of manager and investor agendas this year. What can you do to drive change in your firm?
Christina Rehnberg, Senior Associate
As we leave 2020 behind, despite numerous webinars and news articles about diversity and inclusion in the alternative investments space, we still have a long way to go before the actions yield widespread outcomes. Times are changing though, and we do expect this to be one of the key strategic topics on the agenda for 2021. At NorthPeak, we often get asked how funds can improve the imbalance that exists. Especially, if you are a smaller fund manager without much diversity in the team – where do you start? “Our goal is a level of diversity in investment management firms that reflects the diversity in the world in which we live.”
– David Swensen, CIO, Yale Investments Office, October 2, 2020
Undeniably, diversity should not be a target for its own sake, but rather, it should be the outcome of strategically prioritising a fair hiring process and equal growth opportunities within the firm. Fundamentally, it should reflect an inclusive firm culture that understands the added value of diversity in thought and background. After all, it is the human element that drives innovation and performance of firms and funds, and a focus on unlocking the full potential from diverse talent is a necessary step for firms to prosper as a whole. This is no different in the alternative investment industry. For starters, here are some quick facts we think you should know: Underrepresentation: Women-owned firms manage 1.5% of the total AUM in hedge funds, and minority-owned firms manage 2.7% (Bella Private Markets, 2019). Further, according to Preqin’s 2020 Women in Alternative Assets study, only 18.8% of employees in hedge funds were women in 2019. This compares to 27.8% of female employees at institutional investors. Looking within firms, it becomes apparent that it is more common for women to hold operational and marketing roles, rather than being a part of the portfolio management team. Inclusiveness has improved though, and we do see an increasing number of firms committing to improve diversity at all levels and across teams.Performance: Women-led hedge funds have managed the coronavirus crisis well. The HFRI Women Access Index is +15.7% versus the HFRI 500 Index being +9.7% for 2020 through to the end of December. It is worth noting that the Women Access Index includes 25 funds with $13.2bn AUM and has similar strategy weightings to the HFRI 500 Index, although with slightly lower exposure to macro strategies and greater exposure to equity long short, explaining some of the performance differential. The HFRI Diversity Index is +15.2% through to the end of December, demonstrating relative outperformance.Before the pandemic, Bloomberg analysis found that funds that were not led by white men outperformed their peers nearly 2:1 in the last three years, with macro funds having an even larger disparity. Importantly, it is hard to say that these funds perform better because they are female- or minority-led, and there are likely several confounding factors at play. It is therefore crucial to look further and understand the cultural, strategic and operational characteristics of those funds. After all, women and minorities want to be praised for being good managers, not for being women or belonging to a minority group. One can realise the added value from diverse thought and background as soon as it is given a platform and respected rather than being pure tokenism.Investor demand: Investors too have started to understand the value of diversity and together with seeking more responsibility in their investments, they are placing more emphasis on diversity in their asset managers. In a recent Barclays Prime Services ESG survey of 135 hedge fund investors, diversity policies was the second most required ODD fulfilment, after ESG policies. Regionally, there is a significant difference, with North American investors having a larger focus on the requirement for diversity policies. This has translated into specific questions in investor surveys and innovative products with diversity targets, which NorthPeak Advisory’s CEO, Petra Dismorr, discussed in the Financial Times in response to Aberdeen Standard’s new diversity fund. Further, a number of key US state pension plans and University endowments are actively focusing on making investments in Minority and Women Owned Business Enterprises (‘MWBE’) or promoting D&I initiatives at their existing investors, such as David Swensen, CIO of Yale’s endowment, in his open letter to investors.
How to improve?
Since investors are looking beyond mission statements and glossy marketing documents, for a manager to truly demonstrate a commitment to diversity and inclusion it is important to show transparency about actions, targets and outcomes. Creating a policy that can be shared with investors that documents this approach is becoming increasingly important. If you are only starting now, it is better to disclose where you are on your journey and to set realistic targets for the coming year. In the end, transparency builds trust, accountability, and better relationships. As such, D&I should be included as a strategic priority and an excellent place to start building your action plan is to identify barriers that may exist in your organisation: Initiate a conversation with your employees and colleagues to get their direct insightsReview your recruitment process – are there factors that could create systematic barriers for individuals with certain backgrounds?Assess internal career paths and growth opportunities – are there aspects that could make working at your firm less attractive for a woman or a person belonging to a minority? What is your maternity/paternity policy? What is your flexible working policy?Consider initiating an internship / fellowship opportunity that targets women or minoritiesCommit to transparency and start measuring and disclosing progress on diversity KPIs. You can for example look to complete the AIMA and Albourne D&I questionnaireSet realistic and quantifiable targets against the KPIsSet up a D&I committee or working group to ensure oversight of your action planSupport and engage with industry initiatives and organisations working for D&I (e.g., Girls Who Invest and She Can Be)
The strategy for 2021 and beyond creates an opportunity for fund managers to improve and adapt to the changing world and evolving requirements of investors.Get in touch at info@northpeakadvisory.com if you would like discuss how you can spark lasting change within your firm.