Why Are Women Launching Hedge Funds?

“So, what do women bring to hedge funds?” the interviewer asked in a Zoom call that I agreed to join to promote my book. I stared blankly. They alarmingly inquired if the screen had frozen. No, it had not. I batted an eyelid to prove it.

To be fair, the question sounded relevant because, in the coming year, we will allegedly witness a record number of nine hedge funds launched by women. Two of these new funds may even start with the significant marker of $1 billion in assets. Of course, it is a well-documented practice in the annals of the industry for promising young professionals in the investment team of an established hedge fund to secede, often with the backing of their former employer. Julian Robertson alone, the legendary founder of Tiger Management which closed in 2000, gave birth to some fifty new funds dubbed Tiger Cubs or Tiger Seeds. More recently, Viking Global, itself a spinoff of Tiger Management, became a major launchpad for half a dozen funds which, besides opening with well over half a billion dollars in assets, offered credible contenders for nerdiest name ever. D1, Anomaly Capital, and Voyager are my faves. Until now, these superstars were all men. So, the news that Mala Gaonkar, formerly at Lone Pine Capital, and Divya Nettimi, previously at Viking Global, could venture on their own in 2022 with the pleasantly round number of a billion dollars to manage is both a sign of progress and a reason to rejoice.

Still, never one to miss an excellent opportunity to antagonize, I answered curmudgeonly: why do we have to bring anything as women? Would you ask a male hedge fund manager what men bring to investing?

I recall explaining in several articles that we need more than 1.1% of the $71.4 trillion in assets under management and $100 billion in profits in 2015 that constitutes the investment management industry to be directed to woman- and minority-owned firms. Was I not convincing or eloquent enough? I couldn’t help but wonder: is inclusivity in investing still a debate in 2021? Well, bis repetita placent, as they say. I love driving the crowd wild with the oratory stunt of a bit of Latin.

As investors, we are in the business of ideas. “It’s not said enough that a lack of diversity is boring as hell. More diversity means better ideas.” That’s not even from me, it is a quote from Adam Baidawi, editorial director of Gentlemen’s Quarterly – or GQ, as this bastion of masculinity is known nowadays. What do I mean exactly by the business of ideas? I mean that the product we sell may be packaged as distressed, risk arbitrage, private credit, loan securitization, you name it: at its core, it is creative thinking. Viewed as such, with the lens of imagination, ingenuity, inventiveness and originality, it becomes patently obvious that the profession is in better shape when diverse.

Second, in the business of investing, the main – perhaps the only – resource is people. That is our precious raw material, our invaluable input, and our competitive edge. Can you name a credible business that restricts sourcing its raw material to only 31% of the available supply? It also means that inventory management is talent management. A trustworthy investment firm optimizes hiring, retaining, and promoting its people, just like a decent widget maker fine tunes ordering, storing, and using its inventory.

Now, if neither one of these two reasons convinced you, try this on for size: women are better investors.

Wait, did she really say that? I did, but only because I read it somewhere else. Four times in fact. The seminal 2001 paper “Boys will be boys: gender, overconfidence and common stock investment” tested the hypothesis that men are overconfident compared to women in the area of finance, which results in men hurting their net performance due to excessive trading. The most striking observation was that single men traded 67% more than single women and reduced their returns by 1.44% annually. In 2018, the Warwick Business School compared male and female investors and their trading behavior at Barclays over three years, finding that women outperformed men by 1.8% per year. In 2019, Hargreaves Lansdown, a large U.K. retail investment platform, reported that women returned on average 0.81% more than men over a three-year period. And finally, a 2021 study by Fidelity Investments showed that on average across 5.2 million accounts, women investors outperformed men by 40 basis points per year from January 2011 to December 2020. All studies posit that women tend to display a longer-term investment perspective while men rack up more trading costs that erode returns over time.

Hold on a minute, interjects the cynic, aren’t women more risk averse? Yes, they are, according to several studies (“Gender Differences in Preferences”, 2009 and BlackRock Investor Pulse survey, 2014), but in no way does it lead to their being inferior investors. Seeking risk is neither a strength nor a quality. It’s really nothing to write home about. Some people thrive at risk-taking, Evel Knievel for example, the stuntman who successfully landed his Harley Davidson 133 feet over fourteen Greyhound buses. But that would not necessarily make him a good hedge fund manager – just a good candidate for groin injury. Smoking is risky; hazardous even. To quote Fran Lebowitz, most people who smoke will eventually contract a fatal disease and die, but they don’t brag about it, do they? No, risk is not an end point, particularly not in investing. What matters is the amount of return one gets per unit of risk and in that respect, studies point to women performing better.

Finally and if all else fails to matter, there is this: as women, we bring to investment management half of the population.