With recent research from Knight Foundation revealing that as little as 0.04% per cent of US-based AuM is managed by diverse-owned hedge funds, investors are increasingly requesting data and actively looking to invest in diverse funds.
With recent research from Knight Foundation revealing that as little as 0.04% per cent of US-based AuM is managed by diverse-owned hedge funds, investors are increasingly requesting data and actively looking to invest in diverse funds.
The asset management sector has never been applauded for its efforts in diversity; Knight Frank’s data reveals that only 1.4% of total US-based AuM was managed by diverse-owned firms in 2021. This only reflects a 0.4% growth on from 2016.
Across 10 years, these figures haven’t improved very significantly. Currently, for hedge funds, 3.4% of US-based AuM is managed by minority-owned firms and 2.2% is managed by women.
While disappointing, it seems that investors have finally had enough and are calling for improvements on DE&I in hedge funds.
“We’ve seen intermediaries becoming a lot more structured and systematic with the information and data they collect. They’re stricter with their due diligence, in terms of ESG and DE&I, and also measuring the progress,” notes Andra Ofosu, founder of Black Hedge Fund Professionals Network and director at Aspect Capital.
This change is directly linked to institutional investors increasingly requesting data on DE&I from hedge funds, encouraged by the revival of the Black Lives Matter movement in May 2020 according to Impactus Partners co-founder and 100 Women in Finance director, Ulrika Robertsson.
A study from AIMA showed that 90% of hedge funds surveyed viewed improving DE&I as a ‘very important’ or an ‘important’ theme in terms of how the hedge fund industry sources talent.
However, Preqin data also shows that fewer than 5% of hedge fund managers have formally introduced a DE&I initiative.
Are hedge funds missing a trick by not putting in the effort to diversify their teams?
“Just from a research point of view, cognitive diversity is great in an investment process. You have people from different backgrounds and with different mindsets who therefore challenge each other and ultimately make the better investment decisions,” says Mercer principal, Robert Howie.
Investor demand
Either way, it’s clear that this is quickly becoming something investors are increasingly paying attention to. Investors are investing in women and minority-led funds 21% more than they were five years ago, and 18% expect to grow this in 2022, according to a BNPP 2022 survey.
According to ESG research from investment consultant, Mercer, investors are increasingly demanding evidence of impact and are looking past a simple policy or ESG label which so many hedge funds have historically used.
Key trends from investors have included an increase in the search for diverse managers, as well as ESG questionnaires from consultants becoming more nuanced and specific – specifically with regards to DE&I.
The biggest problem has always been on the investment side, according to Juliette Menga, chair of ESG committee at Aetos Alternative Management. She believes more targeted questionnaires which look to analyse the diversity of a firm’s team and board point to progress.
For example, head of alternatives solutions group at JP Morgan Asset Management, Jamie Kramer has made a point of asking the investment committee whether they considered investing in any diverse managers in the due diligence process.
“We’ve always seen those questionnaires from consultants and other allocators asking about DE&I, but now we’re seeing more consistent questionnaires asking about the diversity of a team and the decisionmakers which are more nuanced than before,” adds Menga.
However, while there may be signs of progress, this isn’t necessarily the case across the entire industry.
“DE&I, the composition of teams, questionnaires and just generally holding managers accountable is a much bigger topic in the US compared to Europe,” notes Robertsson.
She adds that, while she works mainly with Nordic, Swiss and British investors, she doesn’t see the same drive for DE&I as there is across the pond. Questions from investors are much more focused on the environment and climate.
Hiring and talent
The future looks promising, with Société Générale capital consulting and cap intro director, Tom Wrobel suggesting that hedge funds are starting to realise the importance of the ‘S’ and ‘G’ in ESG and think a little more about how they’re running their business rather than just ignoring it altogether.
“One visible change is how some of these larger firms are hiring heads of DE&I for the first time and investing in something which they deem important,” notes Ofosu.
“Firms have gone from identifying this as an important area, to actionable steps to engender real change. For instance, especially within HR, there’s increased understanding of what practices can engender a more inclusive firm, such as blind CVs, to overcome biases in the hiring process,” she adds.
One of the most common excuses for hedge funds not being diverse enough is a lack of women and minority talent within the space.
“When people tell me that they can’t find female talent, I ask, where are you looking? Every university in the US has over 50% of students who are women and can be trained. It doesn’t take a finance major to forge a path in this industry,” Kramer points out.
Robertsson thinks that the way this is pitched and sold is key to solving the issue.
“My view is that this needs to be presented as an opportunity, in a commercial way. If you tell hedge funds and institutional allocators that they’re missing out on superior returns and opportunities, purely because they’re not hiring from the biggest universes of talent, it could help to create this momentum and drive to invest in diverse fund managers,” she says.
Read the full Hedge Funds & ESG: Navigating internal change and responsible investing Insight Report here.
