Time to Dig In: High–Ranking High Heels in Hedge Funds
By Gigi DeVault (Munich)
Like some behemoth glacier that relentlessly exerts tremendous destructive force as it grinds its way to a final standstill, the financial crisis has pulverized the stalwart bedrock of global fiscal wellbeing. Engaged as we are in the massive scale clean-up of the debris of financial ruin – if the reader will further indulge this author’s use of metaphor—we may miss that the landscape is being naturally reshaped in places – pushed ahead like a terminal moraine that will ultimately provide a toe-hold for new forms of habitation.
One such structure of the financial landscape that is being subtly re-formed (and reformed) is the hedge fund. Women, a small minority of hedge fund managers, are helping investors find a smoother, safer, successful path to their goals.
Who are those guys?
Good or bad, the hedge fund industry tends to be populated by relatively young managers, a growing number of whom are women. According to a recent report entitled Sex Matters: Gender Differences in the Mutual Fund Industry, current estimates are that only 3% of the $1.5 trillion invested in hedge funds is managed by women.
Counterbalancing that figure is the membership of more than 10,000 women in the group 100 Women in Hedge Funds. In an article for Forbes, Suzanne McGee estimated that of the board and committee members of this group, only about 10% are directly involved in trading and investing, and only one runs her own hedge fund. Most of these women are not on the front lines taking a hands-on role, but instead have supporting roles within the hedge fund industry.
An anonymous contributor to a discussion on women in hedge funds told the London correspondent of eFinancialCareers that “There are plenty of women in the hedge fund industry, but very few who are trading – really taking risks…There’s something that prevents people from being totally comfortable about signing their money over to a woman… Somewhere buried deep in the psychology is the notion that people don’t trust us with their cash.” This post was made in 2007. The trust needle is still moving.
Why are the numbers of women in hedge funds so small? Even though anyone who works in banking and finance has pretty much been summarily and pejoratively lumped together by popular media, their reputations bludgeoned, it is probably not a case of – as Groucho Marx said (and was later paraphrased by Woody Allen) – not wanting “to belong to any club that will accept me as a member.” Women who do join the club have the entrepreneurial orientation, high level competence, and risk-intelligence to achieve strong returns even, apparently, during the worst of times. Hedge Fund Research (HFR) collected data for its HFR Special Report Decade In Review 2000 – 2010 and found that women–owned hedge funds were characterized by higher returns than a broader composite of hedge funds. According to the hedgefund journal’s report on the top 50 women in hedge funds [PDF], women-owned hedge funds delivered an annual average return of 9.06% compared to 5.82% for the larger set of hedge funds. This marked difference in returns has stood during the fiscal crisis. In the downturn, according to HFR data, women-owned funds had an average drawdown of 9.61%. The average drawdown of all other funds was 19.03% during the same period.
Now that the credit crash avalanche has stilled, save for the occasional reverberation of some unexpected slippage here and there, analysts are looking back up the slope to see how managers positioned themselves in the downturn. In his New York Times article, After Strong Year for Hedge Funds, Investors Return, Paul Sullivan explained the value of a retrospective deeper dive into hedge fund investment strategies. David Donabedian, Chief Investment Officer at Atlantic Trust, told Sullivan that “There is now a track record for how the industry performed from October 2007 to March 2009. You can look at protected assets: Were they market-timing or did they do it through security selection?” The value of this hindsight, Sullivan explained, is that it has permitted the differentiation “between hedge funds with solid strategies and those driven by the momentum of the bull market.” What is more, “there has also been a move to rethink what a hedge fund should be used for: Is it to get outsize returns, or to preserve capital regardless of what happens in the broader markets?”
This is exactly the question Nancy Havens, of the eponymous Havens Advisors, asked and answered early in her career. When Suzanne McGee interviewed her for the Forbes article Hedge Fund Women, Havens shared a tale of risk underestimated. “It’s the most I have ever lost on a single position. As a result, we significantly changed the manner in which we managed risk. We never sustained that kind of loss again.” Havens Advisors shifted its risk assessment so that potential trades were classified by risk level at the gate, and limits were imposed on certain types of higher risk investments. This is what is meant by risk intelligence.
What’s your risk intelligence IQ?
Everyone knows the steps to the pay gap dance by now, but in the financial services sector, the steps take on more of a “Mother-may-I?” quality. According to the UK Equality and Human Rights Commission, the overall pay gap is larger in financial services than in any other part of the British economy. In its 2009 Financial Services Inquiry [PDF], the commission reported that “women working full-time in the finance sector earn 55% less per year than men working full-time” and that the earnings gap men and women who work full-time “is twice as large as the average gap across the economy as a whole.”
The commission suggests that one reason the highly paid jobs in the London financial center are male dominated is because of “the prevalence of a short-termist ‘reward for risk’ culture.” In keeping with term risk-intelligent that is showing up with more frequency in reference to women investors, research in the US indicates that “women may be relatively risk averse as fund managers, with more consistent and less extreme investment styles than men.”
The game being played is called reward for risk and men tend to walk away with the first-place ribbons pinned on their chests. The pockets of the male money managers are padded, too, with what is called performance-related pay. But the gender pay differentials do not reflect true differences in hedge fund performance as, according to the UK Equality and Human Rights Commission report, “female and male fund managers show no significant differences in average performance.” Male fund managers achieve more extreme performance outcomes—apparently rewarded on that well-known powerful intermittent positive reinforcement schedule we all learned about in Psychology 101. But the male managers also show less performance persistence —their outcomes swing more widely, for which they seem to be more readily forgiven by investors then similarly performing women managers. It comes as no surprise, then, that according to Sex Matters: Gender Differences in the Mutual Fund Industry “female managers receive significantly lower inflows, particularly from institutional investors.”
Mommy, what did you do in the war?
In her article for the Guardian, Female Touch is Boosting Hedge Funds, Philippa Aylmer wrote that the top 50 hedge fund managers interviewed for the hedgefund journal report would not want any details about their personal or family lives included. She could just as well have said that these hedge fund stars may not wish to call attention to the fact that they have the same personal/family pie as everyone else, but they can only enjoy a much smaller slice. Running a hedge fund is an all-consuming vocation; being responsible for a strategy or a portfolio is like glissading down a snowfield – you can’t take your eyes off the environment, even for even a minute. And even an eyes-wide-open, adrenaline fed run doesn’t guarantee there won’t be crashes. For Forbes, Suzanne McGee interviewed four women who built and run investment portfolios in the hedge fund arena. “The common thread linking them,” McGee wrote, ‘is their willingness to eat, sleep, and breathe their jobs to an extent that even the most ambitious Wall Street trader could view as excessive.
One of the women interviewed by McGee, Renee Haugerud, launched her own global macro fund about a decade ago. Haugerud is good at the game and admits to enjoying “risk” – making bets that make money. But she has seen this phenomenon called risk come back to bite the hand that feeds it. McGee quoted Haugerud as saying, “Over the course of my career, I’ve certainly known of women who lose smaller amounts trading than their male counterparts and end up tossed off a trading desk. It seems that investors are more likely to believe that a man who loses money will find a way to make it back.”
Where did this pumpkin come from?
In April of 2009, as the financial world was enduring melt-down after melt-down, Christina Binkley, the business style journalist, wrote Cracking the Hedge-Fund Dress Code for Women in the Wall Street Journal. This was not as frivolous or sexist as it first sounds. Investing is all about trust, confidence, and the ever sought after elusive edge. Like it or not, as Binkley says, “Clothes signal our place at the table.” In the hedge fund world, norms are shed like rain bouncing off a patent-leather Burberry trench. The new black is “power casual” and it is everywhere in the hedge fund world – on men.
Women who want to convey their abilities in the hedge fund world will find they must walk a fine line in their – not-too-much-heel, thank you – glass slippers. Come midnight, clothing choices can have dire consequences. The clothing choices women have are much broader and more complex than those for men. When Binkley writes that “the risk of a mistake is magnified,” she is talking about impressions made by choices in business attire that women make, but that same principle applies to investment performance.
The scrutiny to which women are subjected may have a chilling effect on their risk-taking behavior and it very likely means that they may not be allowed to recover well when their risk-taking results in failure or loss, as Haugerud reminded us. The good news is that Binkley’s article on power apparel is as much about what the men wear as it is about what the women wear. If it were not, then it would be a bit like having an extended debate about Michelle Obama’s sleeveless dresses.
Who has the right-of-way at a round-about?
The un-natural disaster of 2009 has collected – like a snowball rolling downhill – at least a half dozen titular references. Global fiscal crisis. Credit meltdown. Economic downturn. Regardless of what it is called, what it has exposed has been ugly and craggy and dangerously sharp, claiming unwary victims whose growing numbers have been tallied by popular media.
A stream of ideas about corrections (regulatory, not market) has relentlessly flowed and circled, sped up and slowed down, like cars jockeying for advantage in a European round-about. Speed and chutzpa and who-you-know has sometimes bested thought leadership. But there is no escaping the need to dig out from under what has collapsed onto our heads. The hedge fund industry—returning to investor favor with its event-driven strategies focused on distressed debt and fixed income—is faced with particular challenges. In May, the 100 Women in Hedge Funds group is holding a series of education sessions around the globe. Regulatory reform issues will be addressed by a moderated panel tonight in Greenwich, Connecticut.
To glimpse the sort of change that hedge fund managers may soon face, one has only to read a description of the panel discussion: Congress is considering major financial regulatory reform that will have great significance to the hedge fund industry. In particular, “systemically risky” firms could be subject to heightened prudential standards and even forced dissolution through FDIC receivership.
The nature of the hedge fund industry is characterized by innovation and change, and it appears to be poised to excavate the cirque. Ladies, “man” your shovels. It is your game now more than ever.
