“A lack of diversity creates a lack of diversity”: Capital Generation Partners’ Charlotte Thorne discusses inclusion in the hedge fund industry
Charlotte Thorne is a founding partner and co-chair of Capital Generation Partners, a multi award-winning independent investment management firm serving ultra-high net worth clients.
Established in 2007, CapGen manages the investment needs of some of the world’s wealthiest families, spanning portfolio management, commercial real estate, direct private equity and hedge funds.
Thorne, a member of CapGen’s investment committees, has a background in financial policy having spent several years at HM Treasury advising both Conservative and Labour chancellors on issues including corporation tax and pensions policy, before working in Brussels in the Diplomatic Service during the launch of the euro.
In an in-depth conversation with Hedgeweek’s editor-in-chief James Williams during last week’s Hedgeweek LIVE Europe digital summit, Thorne discussed how diversity and inclusion are reshaping the hedge fund industry, and explored some of the challenges and opportunities for firms arising from this growing trend.
JW: How far behind the curve do you think we are as an industry in Europe today?
CT: I'm conscious there may be some diversity conversation fatigue, which I completely understand and sometimes empathize with myself - it can be exhausting. The other thing that’s happening, which is detrimental to all of us, is that some of the diversity conversations in the public sphere are more about shaming the other side than they are about genuinely increasing diversity. I fear that there’s virtue signaling, there’s cancelling and I think we can all agree that’s utterly unhelpful.
Having said that, yes, I think it is an issue. I think between perhaps 2-3 per cent of assets in the hedge fund space are managed by women principles, and that probably doesn't compare brilliantly even to the rest of financial services, which itself also isn't brilliant. In the rest of financial services fund managers, it’s anywhere between seven and ten percent. For black and minority ethnic managers it’s similar.
To be fair I think it is actually difficult for hedge funds to move, to be at the forefront of this space, and I don't think that's necessarily through any through any lack of will.
It’s a lot do with the way hedge funds evolve individually. They tend to grow out of a fairly tight niche group of traders, who are very used to working together and have developed a very close and tight-knit language amongst themselves in their enterprises. They may spin out of a bigger bank, set themselves up on their own, but at the beginning they may be a very small number of people. So it is very difficult for hedge funds, and I absolutely have sympathy with them.
We are starting to see one or two of the larger hedge funds attempt to crack that open because they’ve got the bandwidth to be able to do that. That’s promising. One of the hedge funds that we have on our buy list is effectively an incubator for smaller hedge funds.
The purpose of the fund that we are invested with is to get these smaller groups to escape velocity so they leave the emerging manager bracket and evolve into institutional size. They have a higher proportion of women and minorities running the funds that they effectively incubate. So there are signs.
JW: There is a long way to go, but it’s important that managers approach this in a way that they want to be doing the right thing that makes sense for them, and they see the they see the benefits of it. It shouldn't be a box-ticking exercise. Preqin data shows there seems to be a bias towards COO and CFO roles – at around nearly 20 per cent women - but when you then look at CIO / managing partner / founder roles, you’re down into the 4-5 per cent mark. We are moving from a pretty low base here.
CT: I’m absolutely not surprised by those figures. I think there are some diversity employee kitemarks you can sign up to, and that I fear has a large element of box-ticking in it. What I would say, though, is don’t discount the value of having other women and minorities around in your firm generally as a starting point.
It’s going to be very difficult for hedge funds to move from here towards where 50 per cent of portfolio managers are women. There are so many issues there to unpack – there’s an issue with pipeline, an issue with this space just not being very loved. The industry broadly doesn’t have the greatest reputation among this next generation that’s coming through. I think we all have a job to get out there and talk to people about what it actually means to work in our sector - whether that’s financial services generally, or hedge funds.
But I wouldn’t discount the value of having women representing the firm in, for example, the CFO role. It’s not the end goal here, it’s not the end purpose of this conversation. But our CFO is a woman and we go quite often into schools and just the visual impact of the two of us talking in schools about what it is to work in wealth management – it switches on a few minds. It’s not going to move the dial, but it’s really worthwhile. I think a lack of diversity creates a lack of diversity.”
JW: If we don't have that mix of different views and ideas, teams from different backgrounds, from different ethnicities, different genders, you’re not likely to ever really fulfill your optimal potential. Everyone I’ve just alluded to there is an exceptional talent and should be hired because they are an exceptional talent.
CT: Absolutely. I'm not an advocate for any kind of positive discrimination in terms of hiring but I think one has to look at the pools from which people are being hired, and ask if this really is the broadest possible pool of talent.
Even if it is the broadest possible pool of talent, in terms of this very specific niche that I’m looking for - which it may well be, because hedge funds often hire for very specific and technical skills - what other perspectives do I need in the room to make sense of this?
We were stuck internally by the number of US hedge funds, for example, who were betting heavily against the eurozone back during the eurozone crisis.
That probably made enormous sense from a New York townhouse. But you didn’t have to be that much closer to Europe to understand that the implications of the eurozone had a quite different touch and feel, clearly in the UK, but specifically in Europe.
One wonders, with hindsight, what would have happened if there’d been different perspectives in that room when those when those trades were put together
As I said earlier, we do see some of the larger hedge funds starting to build out their teams, build different functionalities within their teams. That’s definitely of interest to us; just different angles on similar problems. That’s potentially of interest and that ought to bring with it greater diversity.
JW: This next generation of investors, the younger generation in the family offices that you work with, they are going to be looking at these issues more carefully going forward.
CT: There will be two pressures on hedge funds to move on this. One is performance; the other is investor pressure. Candidly, we have not heard a lot of investor pressure, from our family office investors, to push for greater diversity in the hedge funds that we invest in on their behalf in.
However, that is in the context of many of our family office investors being somewhat reluctant investors in hedge funds in the first place. We’ve always been significant advocates of what hedge funds do for our clients’ portfolios, which is long-term capital preservation.
But we're not always pushing at an open door with our clients. We have some clients who are kind of happy to have hedge funds in the portfolio. We have other clients - often the more actively engaged clients - who may have been reluctantly willing 10 years ago but maybe three years ago decided to remove hedge funds from their portfolio.
Now obviously the needle is moving again, and those clients are starting potentially to look again at hedge funds, but it’s almost from a reluctant standpoint.
But we are also seeing a wealth of transition. We have a number of female clients on our books. There is another transition taking place towards the millennial generation. They are generally more interested in ESG, and of course diversity and inclusion is part of that.
US public funds are slightly ahead of the curve compared to the UK and Europe, but I think what’s happening in the UK and Europe is that asset allocators such as ourselves are starting to manage and monitor. Not necessarily make decisions on this basis, but to manage and monitor and to interrogate the managers about where it seems potentially relevant, to a performance issue, a transparency issue, wherever it may be.