Alpha (Fe)Male: Do Female-Led Hedge Funds Beat Their Peers?

What Is a Hedge Fund?

Hedge funds are investment houses that employ various alternative strategies to earn high returns on investment decisions. They are subject to less regulation than other funds, enabling them to pursue unusual investment strategies which often involve greater risk. In turn, these riskier strategies can yield very high, opportunistic returns. Hedge funds require large initial capital investments from accredited investors, which remains relatively illiquid for at least one year; the lock up period [1].

Business Case: COVID-19

During Q1 2020, female led hedge funds lost 3.5% on investments according to the HFR Women Access Index compared to the 5.5% lost recorded by the HFRI 500 index which incorporates both male and female investors [2]

Similarly, hedge funds that aren’t controlled by white men have had average returns of 6.6% compared to their white male peers who have had returns of 3.9% over the past 3 years. According to the Bloomberg database minority and female hedge fund managers fare 79% better than their peers [3].

At an even more basic level, a University of California, Berkeley study looking at 35,000 households with large investments accounts between 1991 – 1997 found that women were better investors than men. The men had an annual risk-adjusted net return that was 1.4% lower than the women [4].

Throughout this article I seek to evaluate whether this comparison can decisively conclude that female fund managers gain better returns than their male counterparts, or if it is not so straightforward.

A Trend?

It is possible that female hedge fund investors outperforming their male peers may represent a trend, as opposed to an anomaly observed during the pandemic. Research has shown that in general women are better at mitigating risk, hence their relative over-representation in risk management roles. This risk awareness could be a contributing factor as to why female investors tend to have limited losses [5].

Another reason why female hedge fund investors tend to outperform their male stems from the differing barriers to enter the industry. The hedge fund business is heavily male dominated. According to the 2018 Preqin report, 18.8% of hedge fund investors are female, with the proportion of females in senior positions at just 10.9%. This disproportion highlights the accolades of the females who have managed to break into the hedge fund industry [6]. Expressed by founder of Triada Capital, Ms Hsiao, “We [women] definitely have to go through a lot more to even get where we are”. This means that they develop unique approaches to investing that possibly men aren’t required to develop. Ms Hsiao furthers her point by saying “Because we’re a minority and because we’re not part of the boys’ club I think we tend to be a bit more unconventional in our approach.” Triada, the Asian credit-focused fund gained 4.25% during April 2020, at the height of the pandemic [7].

Additionally, a host of all-star female hedge fund managers can wave the flag for female investors. Examples include the likes of Leda Braga, CEO of Systematica which trades utilising a computer algorithm managing $8.6 trillion. There are also managers like Toku Sinantha, Deshay Mccluskey and Jacqueline Hayot at Altra Vue capital, the female and minority ledge hedge fund, with $235 million assets under management (AUM) [9].

Coincidence?

Although, the information surrounding female hedge fund outperformance is compelling, it may be limited in its credibility. Aberdeen Standard estimates that only 1% of hedge funds are female run, which they believe to be an acceptable comparison with the 99% of male run hedge fund peers. However, Leda Braga argues that there aren’t enough female hedge funds to analyse the data to support any decisive conclusion [10]. Hence, it is hard to tell whether females are intrinsically better investors than males. Nicole Boyson, associate professor of finance at Northeastern University argues that “We can say pretty definitively that women are not worse performers.” Despite this, Professor Boyson’s research paper found that female led hedge funds had a higher failure rate than their male counterparts due to difficulties in raising capital [11]. This suggests that there is nothing fundamental about being female which makes someone a better investor.

If Women Are Better, Then Why Aren’t There More Female-Led Hedge Funds?

Professor Boyson’s findings about the struggles of female investors to raise capital has been echoed by Jane Buchan, Chief executive of PAAMCO – a $24bn fund of hedge funds. She argues that female investors have to perform better for the same asset allocations as a man, ”To get the same [level of assets as a man], you have to outperform by 200 basis points”. This barriers to entry argument is substantiated by the Rothstein Kass 2014 research report, which found that 79% of hedge fund professionals through it was harder for females to raise capital [12].

Perhaps a historic argument now, but hedge funds may not offer females the ideal working environment. With hedge funds facing looser regulatory scrutiny, it is common for there to be poor maternity packages and weak mentorship opportunities for females. Additionally, the environment can be overtly hostile to women, with female hedge fund employees reporting sexism in the workplace and at corporate functions [13]. Issues of this nature may be discouraging for some women entering the field.

Conclusion

Although female led hedge funds outperformed their male counterparts during the pandemic, it seems harder to tell whether this is a trend or coincidence. It remains that there are too few female-led hedge funds to make a meaningful comparison of investment strategy and return. With such a little reference pool, it would be a great oversight to start making such generalisations. Regardless, it’s safe to say that the female hedge funds that do survive tend to have overcome more adversity than their male counterparts, which is sometimes evident in their outperformance of their male counterparts