Emerging Manager Mandates Could Make a Difference for Women in Alternative Investments

By Melissa J. Anderson (New York City)

As more and more investors take notice of research showing the outsized returns that women produce in the alternative investments industry, pension funds are becoming the source of a growing call for diversity. Investors want plans to better reflect the diversity of their constituency, and they are keen to take advantage of the outperformance of women managers compared to their male counterparts. In some states, this has led to an explicit or implied preference for women or minority owned or managed asset management firms, known as emerging manager mandates.

The move toward emerging manager mandates was discussed in Rothstein Kass’s recent report, “Women in Alternative Investments: Building Momentum in 2013 and Beyond.” The authors, Meredith Jones, Camille Asaro, Kelly Easterling, write that, although they are still somewhat rare, diversity guidelines are increasingly present at funds in some states. They write, “This is no doubt due to the fact that funds of funds can offer large pensions a way to achieve a meaningful investment that ‘moves the dial’ within their portfolio, without extensive due diligence on a host of single manager fund products.”

That’s not to say that the focus on emerging managers is new. Renae Griffin, Founder and CEO of RG & Associates, recalls the term from her days working in investor marketing and relations. “This term was being used in the early ‘90s,” she explained. “At first it referred to minority and women fund managers only, but the terms was expanded to include small managers.” Today, RG & Associates and others are beginning to refer to emerging managers as “diverse and small managers”

“The investment world is looking at the demographic shifts taking place domestically and ways to capitalize on it. We benefit by having diverse thought and diverse experiences that come from having more minority, women, and niche players in the industry,” Griffin continued. “There’s also a nimbleness in smaller firms’ expertise.”

But, she says, firms shouldn’t be deterred by the word “emerging.” She explained, “Just because we use the term ’emerging,’ it doesn’t necessarily mean they are new to the industry. Many of them have left larger firms and have years and years of experience managing billion dollar funds. They are the hidden talent that a lot of institutional investors are looking to attract and dispose of to reap those alpha generating rewards.”

Increasing Diversity

Some states, like Illinois and New York have explicit mandates to hire emerging managers, and others, like California, have an implied preference for them. The Rothstein Kass study says:

“For example, Maryland, which has invested $4 billion across 65 women- and minority-owned investment management firms, relies on a 25 percent agency procurement policy that can encompass contracts with women- and minority-owned funds. Others, like California, have stated policies against so-called “affirmative investing.” In 1996, California voted to enact Proposition 209, which specifically prohibits affirmative action in its investment activities. However, at a 2012 public legislative hearing, both the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) indicated that they had been actively engaged in recruiting diversity investment managers, and that $3 billion was managed by 80 diversity firms.”

Even still, this work is only scratching the surface. Of the 366 senior women in the alternative investment industry polled for Rothstein Kass’s survey, only five percent said they had received emerging manager funding. The authors of the report listed 34 funds with over $10 billion in assets under management, in states that had an explicit or implied preference for female managers. “If a mere 5 percent of these assets were directed to women-owned or -managed alternative investment management firms over the next five years, nearly $95 billion could be up for grabs,” they write.

Griffin says she has noted a shift in attention to the topic of emerging managers in the last year or so – possibly due to the slight uptick in the economy. Her firm, RG&A, is organizing Consortium 2013. The conference is an annual event in New York City for emerging managers to meet institutional investors. “I was exposed to the minority manager community when I worked at Progress Investment Management,” she explained. “I began to understand the challenges of gaining access to capital that diverse fund managers encounter and realized there was a value in bringing institutional investors and fund managers together who didn’t necessarily know each other.”

She continued, “There are a lot of resources out there for diverse individuals to gain footing in the industry. But I think it’s also important for people who are interested in starting a fund to look for the best team of individuals and mentors who can assist them and instruct them correctly and make sure they are sufficiently capitalized to survive the 2 year+ fundraising period. And there are more diverse individuals coming into the space. We are seeing that growth now.”