Hedge funds’ progress toward employee diversity improving

Updated with correction

The hedge fund industry remains a bastion of white males, but for reasons that may have more to do with investment performance and business survival than conscience, many firms are aggressively seeking to hire, retain and promote more women and people with diverse backgrounds, including military veterans.

The problem is that there is a dearth of candidates with desired diversity characteristics who want to work for a hedge fund, sources said.

"All hedge funds would agree that the talent pool is very limited. There aren't enough diverse candidates, be that women, ethnic minorities, different educational backgrounds, etc.," said Sara Rejal, global head of liquid diversifying strategies at Willis Towers Watson PLC, London, in an email.

"Most hedge funds would argue they have good cognitive diversity (and) some will also point to the number of languages spoken within their teams. They will, however, largely admit that when it comes to gender diversity at the senior level in particular, they are lacking," Ms. Rejal said.

Industrywide statistics about the level of diversity and inclusivity within hedge funds are scarce, particularly metrics about race, ethnicity and sexual orientation, sources said, noting that the most commonly used workforce measurement is the number of non-caucasian males employed.

Researcher Preqin Ltd., London, noted a slight increase in the number of women employed worldwide hedge funds in all roles to 19.3% in 2019 from 18.6% in 2017 within its data base of money management professionals.

"The hedge fund industry has made material progress across job functions, but it's no secret that white males still dominate the space," said James J. Gnall, vice president, alternatives and advisory, Wilshire Associates Inc., Santa Monica, Calif. "The investment side of the business still is the arena of white males, but it's definitely getting better."

Preqin's analysis supported Mr. Gnall's observation: In 2019, 23% of hedge fund investment team employees worldwide were female compared to 6% two years earlier.

Despite efforts to recruit more people of color, hedge fund managers may find institutional investors unwilling to invest in a fund led by a black portfolio manager or team leader.

Recent research from Stanford University and Illumen Capital Management LLC, a venture capital and private equity manager based in Oakland, Calif., found "systemic racial disparities in how (institutional) investors evaluate funds and allocate money," according to the paper "Race influences professional investors' financial judgments."

"Well-intentioned investors often leave money on the table in the investment process. Our research found that investors tend to devalue firms with black ownership and leadership even for high-performing funds, said Norris A. "Daryn" Dodson IV, Illumen Capital's managing partner and a co-author of the paper.

Mr. Dodson declined to provide Illumen's assets under management.

Hedge fund managers have heard the message regarding the diversity and inclusivity composition of their employee force directly from their institutional investors, investment consultants said.

"There's a business case for managers because many institutional investors have adopted the concept that diverse teams lead to better decision making. A homogeneous team represents a source of risk — group think," said Tathata "Ta" Lohachitkul, partner and portfolio analyst, based in the San Francisco office of alternative investment consultant Albourne Partners Ltd.

"Many investors … have expressed the perspective that a diverse team leads to cognitive diversity, which leads to better investment outcomes," Ms. Lohachitkul added.

Senior executives at AQR Capital Management LLC, Greenwich, Conn., wholeheartedly agree, said Jennifer Frost, principal and chief human resources officer, in an interview.

She said that over the past decade, the dialogue has changed, noting that "no one questions the business case for diversity any more. Diversity of thought is a group dynamic and we really value non-correlated thinking. It results in happier employees and leads to better retention."

One measure of AQR's targeted diversity efforts is the doubling of women holding senior investment roles at the firm over the last three years. Ms. Frost declined to provide the number of senior women investment executives at the firm.

AQR managed a total of $194 billion as of June 30 of which $60.8 billion was managed in hedge funds.

Recruiters said demand from hedge fund managers for candidates meeting their diversity criteria is running extremely high and competition is intense.

About 57% of the investment management placements across all money management firms made by Jamesbeck Global Partners LLC, New York, over the past 18 months were women or non-caucasians, said Melissa Norris, one of the firm's founding partners who is based in San Francisco.

"Our hedge fund clients will increase compensation and do everything they can to win candidates who will help with their diversification plans," Ms. Norris said.

Because there is a scarcity of such candidates, larger hedge fund firms have become more proactive, deliberate and creative in finding new sources of potential recruits who meet diversity standards, Ms. Norris said. Many hedge funds simply aren't "large enough to be able to staff a dedicated diversity and inclusion team," she said.

Among other large hedge fund managers that have implemented dedicated programs to diversify their employee base, including investment teams, are Bridgewater Associates LP, Man Group PLC, Millennium Management LLC, D.E. Shaw & Co. LP and Varde Management LP, P&I's reporting showed.

The world's largest hedge fund manager, Bridgewater Associates LP, Westport, Conn., has made diversity and inclusion one of its top priorities because "it is essential to finding the best talent in the world," said Eileen Murray, co-CEO, in a written response to questions.

"Homogenous groups are less likely to challenge each other with new ideas and are more susceptible to group think. Therefore, to achieve a flourishing idea meritocracy and create the best outcomes, we need teams ... that are diverse across gender, background, origin, identity and thought," Ms. Murray said.

Bridgewater has established a diversity council consisting of 13 senior leaders that works closely with a dedicated diversity team to implement the firm's strategy that includes company-wide diversity and unconscious-bias training; an immersion program through which company leaders can connect with prospective employees early in the recruiting process; and affinity-based networks and community groups to engage people with similar interests.

One of Bridgewater's most successful programs is its summer internship program that Ms. Murray said is a "significant feeder pipe" into the firm's most important investment, technology and management roles and has produced "many of our top leaders through time."

Ms. Murray stressed that "we are not declaring any success at a headline level" regarding Bridgewater's success in reaching its diversity goals, but noted that roughly one-third of the firm's employees are women, a level the firm intends to increase over time.

Bridgewater managed $160 billion as of June 30, of which $132 billion was in hedge funds.

London-based Man Group's approach to increasing the diversity of its workforce employs most of the practices above and internal recruiters have trained their focus to "look beyond traditional hunting grounds, beyond the usual universities," said Carol Ward, chief operating officer of Man GLG, Man Group's discretionary investment business.

One relatively new source of diverse candidates in the U.K. for Man Group are individuals who have the equivalent of a high-school degree and don't plan to go on to college. This diverse group includes young people who come from disadvantaged backgrounds and various ethnic groups. They are recruited for a 12-month training program for junior-level positions, Ms. Ward said.

Man Group set a target to have women in 25% of senior-executive roles by the end of 2020, which it is likely to reach early, Ms. Ward said. In 2018, 22% of senior roles were held by women compared to 20% in 2017 and 16% in 2016.

Man Group managed a total of $114.4 billion as of June 30, of which $62 billion was in hedge funds.

Varde Partners LP, Minneapolis, has fully implemented a recruitment program specifically targeted to bring more women into the firm.

The effort is driven by co-founder Marcia L. Page, who stepped back from her positions as co-chief executive officer and co-chief investment officer in 2016 to take the role of executive chair so she could focus on the issue of women in investment management.

"At the time, I thought about what had changed regarding women and investment management since I joined the industry 35 years ago. It was shocking to see how little had changed," Ms. Page said in an interview, adding that it became her passion and mission to improve the diversity of Varde's investment teams through the addition of more women.

"I see this as a business issue, not a human resources issue. Good intentions will not achieve the goal. We need to take purposeful action to achieve better investment outcomes by adding more women to the investment team," Ms. Page said.

She stressed that building a pipeline of diverse candidates is hard and that it often takes several months longer to find a candidate with the diverse background the firm seeks than it would for a more traditional hire," she said.

That said, Varde Partners is already more than halfway to reaching its goal of having 25% of its investment teams staffed by women by the end of 2020.

Varde managed $14 billion as of Aug. 31, of which about $7 billion was managed in hedge funds.