Whitney Tilson is the managing partner of the hedge fund firm Kase Capital Management, which he founded more than 15 years ago. Mr. Tilson is also the co-founder of Value Investor Insight, an investment newsletter, and the Value Investing Congress, a biannual investment conference.
A recent report by the consulting firm Rothstein Kass found that hedge funds managed by women performed better than a broad index of hedge funds.
This shouldn’t be surprising, as numerous studies have shown that women take less risk, do more diligent research, suffer less from overconfidence, trade less frequently and are quicker to admit mistakes — all of which lead to higher, and less volatile, returns.
At the same time, the report and other statistics show that few hedge funds are run or led by women. This is reinforced by my own 15-plus years of experience in this business: I’ve met well over 1,000 hedge fund managers, and only a small handful have been women.
If women are, in general, better suited to be successful investors, then this is a strange market inefficiency. It would be like discovering that tall people were vastly underrepresented in the N.B.A. What could possibly explain this?
I posed this question to a woman I know who’s a senior analyst at a well-known hedge fund, and I found her reply so interesting that I asked her to allow me to share it. She did, but only under the condition that I keep her anonymous because, she said, “Women who raise these issues tend to be vilified and often become unemployable.”
But she’s willing to take this risk because “if even one man running a large fund thinks about whether he is being biased when he hires yet another male analyst into a coveted job without considering any females, then I guess distributing my thoughts is worth it.”
Here is what she wrote:
I have many thoughts on this topic, based on 15 plus years in this business. One of them is that there are few women from my cohort left in the business.
Women were disproportionately fired in the 2008 crisis, and most ended up leaving the industry, either because they couldn’t find new jobs or because the jobs they could get offered pay cuts of 50 percent or more from what they made before (the same applies to most men, in fairness). If you can make the same money in a corporate job with less stress, fewer hours, more flexibility and more tolerance of the demands of motherhood, you really have to love this business to have stayed, particularly as a mom.
As for performance, I think there is sociological and perhaps biological conditioning toward risk aversion in women. Most (but not all) women that I know who were managing portfolios in 2008 outperformed their male peers by an enormous ratio. This wasn’t surprising because they always tended to outperform in weak markets. I have always thought it best to avoid the big down years because they tempt investors to pull their money at the absolute worst time – usually right before a manager bounces back because their style comes back in favor, some big positions recover or the market in general improves.
I learned, however, that outperformance in down markets may be best for your investors but not best for your career ambitions. Capital allocators – no matter how sophisticated they claim to be – are drawn to emerging managers who can show one or two flashy big years.
You would think the allocators would understand that big up years are predicative of big down years (for all but the top 10 to 20 managers in the world) and that long-term compounding at lower annual return but lower volume wins over the long term. But it doesn’t work that way in the real world. It’s a problem for the whole investment management world, but it affects male and female managers disproportionately.
She goes on to add:
The other big factor if you’re thinking of starting your own fund is if you want backing by a big firm like Blackstone, they are looking for you to slap down $1 million to $2 million of your own money into the business. To do that, you better have saved at least $3 million to $4 million in your career, and do so before you turn 40 at the latest, because they aren’t into seeding people who are too “old.”
I know exactly two female analysts who are paid enough to accumulate that kind of wealth in their 20s and 30s. I am sure there are more, but you just have to look at the male-to-female ratio at the big funds that pay their analysts $1 million or more a year to know that there are almost no female candidates for the Blackstone-type seed.
She concludes:
The lack of female success in this business makes me sad. I went to a top business school, so women M.B.A. students and recent graduates call me frequently to ask for my advice about going into this field. I love it, but I am conflicted about recommending it. It’s kind of like deciding to be an actor – your hard work and inherent talent may not pay off for you because the odds are stacked against you, so you should do it only if you can’t imagine spending your life any other way.
Another female friend of mine who works at a top hedge fund agrees that few women are in the pipeline, and the women tend to gravitate toward other fields in finance, like private equity, even though those sectors are less family friendly.
“I don’t know whether the screaming trading-desk reputation of hedge funds is to blame, or the misperception that you need to love poker or have been buying stocks since you were 5,” she writes. “Regardless, I don’t think we will see more female hedge fund managers until we see more female hedge fund analysts. This problem extends across finance/asset management, not just hedge funds.”
The dearth of women in the hedge fund industry at all levels is in stark contrast to other professions formerly dominated by men, such as law and medicine. Though women are still underrepresented at the highest levels, they account for about half of all law and medical school students, meaning that the pipeline is full of talented, ambitious women, whereas it’s pretty much empty in my business.
Are the men in the business just incredibly sexist? For sure this exists, but sexism is alive and well in many professions in which women have made enormous inroads. So what’s different about hedge funds?
My observation is that far fewer women, from an early age, have an interest in the hedge fund business. Is there something about it – especially as practiced by most hedge funds – that is less appealing to women than men?
I don’t think it’s primarily because of lifestyle/workload factors. Being a hedge fund manager is demanding and intense, but the number of hours worked doesn’t correlate with fund performance, which is what really matters to investors. In addition, the market is only open 6½ hours a day, five days a week, and most investment research can be done from anywhere, at any hour of the day or night.
This profession attracts all types of people, from social jocks to nerdy loners, but I’ve found that most hedge fund managers share a few traits: they are highly competitive, have an abundance (often overabundance) of self-confidence, and thrive amid high levels of stress and uncertainty. Many are motivated by money, but what they really enjoy is the challenge of trying to outwit the market and other investors. In short, investing is an endlessly complex, stimulating, fascinating, entertaining game that the best practitioners love to play, irrespective of the financial rewards.
There are plenty of women who have some, if not all, of these characteristics, but I’d bet that there are exponentially more men who do. (Incidentally, I’m not saying that these traits, especially taken to extremes, result in the best long-term investment performance. Balancing confidence with humility is critical, for example. I’m simply highlighting what is, not what should be.)
I love this business, and I want my three daughters to be able to follow in my footsteps if they wish. So, if there are barriers to women, I want to figure out what they are and try to knock them down.
Please post your thoughts, questions or observations in the comments section, and my friends and I will endeavor to respond – and perhaps together we can devise some practical solutions to this problem.