Diverse Hedge Funds
Investment funds are often managed by teams of portfolio managers. Anecdotal evidence suggests that driven by homophily, portfolio managers prefer working alongside other managers with similar backgrounds. it is not uncommon for investment firms to be staffed by portfolio managers who all attended the same university, chose the same major in college, worked at the […]
Yan Lu is an Associate Professor of Finance at the University of Central Florida, Narayan Naik is Professor of Finance at London Business School, and Melvyn Teo is Lee Kong Chian Professor of Finance at Singapore Management University. This post is based on their article forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine Jr.
Investment funds are often managed by teams of portfolio managers. Anecdotal evidence suggests that driven by homophily, portfolio managers prefer working alongside other managers with similar backgrounds. it is not uncommon for investment firms to be staffed by portfolio managers who all attended the same university, chose the same major in college, worked at the same investment bank, identify with the same gender, or belong to the same race. For example, the majority of the partners at the now defunct Long-Term Capital Management worked at Salomon Brothers and studied at the Massachusetts Institute of Technology. To address the diversity issues confronting asset managers, industry associations have commissioned reports that seek to improve diversity and inclusion practices. Moreover, institutional investors such as the Yale University Endowment fund, the California Public Employees Retirement System, and the MacArthur Foundation now require that investment firms reveal the diversity of their leadership and workforce, to compel them to improve diversity. These developments beg the question: what are the implications of team diversity for investment performance? While a nascent literature has investigated diversity in asset management, strong and broad-based evidence of the investment benefits of diversity has proven elusive, and the mechanisms by which diversity affects value remain unclear.
