Want Better Hedge Fund Returns? Try One Led by a Woman

In the world of hedge funds, a relative few have a woman at the helm. And yet, these funds may be the standouts from the bunch, a new report argues.

In the years since the financial crisis, hedge funds managed by women performed better than a broader index that reflects the performance of the industry, according to a report released on Wednesday by the professional services firm Rothstein Kass. The report seeks to show that this “alpha” - superior returns, in Wall Street speak - is no mere fluke.

“There is meaningful alpha to be gained from investing in women-owned and -managed funds,” Meredith Jones, a director at Rothstein Kass who wrote the report, said in an interview. “There appear to be both behavioral and biological factors that impact women’s ability to manage money and make them consistent.”

From the beginning of 2007 through June 2013 - a period that includes the dark days of the crisis - a Rothstein Kass index of women-run hedge funds returned 6 percent, the report says. By comparison, the HFRX Global Hedge Fund Index, released by Hedge Fund Research, fell 1.1 percent during that time, according to the report.

Last year through November, the index of women-run funds had a 9.8 percent return, compared with a 6.13 percent rise in the broader index, the research showed. (Still, both indexes fell short of the Standard & Poor’s 500-stock index, which rose about 27 percent during that time.)

The report, titled “Women in Alternative Investments: A Marathon, Not a Sprint,” used a group of 82 hedge funds managed or owned by women. Last year, the firm said that female hedge fund managers produced a return of 8.95 percent through the third quarter of 2012, compared with a 2.69 percent net return for the broader index.

While highlighting the accomplishments of women in hedge funds, private equity and venture capital, this year’s report also draws attention to persistent gender disparities on Wall Street.

The research, based on a survey in September and October of 440 senior women in the alternative investments business, suggests that the vast majority of the top jobs are held by men. Of the women surveyed, only 15.5 percent said their firm was owned or managed by a woman. Among hedge funds in particular, 21.4 percent were owned or managed by women.

About 42 percent of the respondents said that their firm had no general partners who were women. And nearly 40 percent of the firms included in the survey had no women on their investment committees.

In that context, hedge funds run by women remain something of a niche. Some institutional investors, like public pension funds, have a specific mandate to invest a portion of their money in funds run by women or minorities.

Though these mandates can be motivated by political factors, Rothstein Kass is seeking to show that investing with women managers can be a wise choice for purely financial reasons. A handful of studies have suggested that women traders behave differently than their male counterparts, acting less impulsively.

John Coates, a former trader who is now a research fellow in neuroscience at the University of Cambridge, argued in a 2012 book, “The Hour Between Dog and Wolf,” that testosterone contributed to market swings. Hiring more women on trading floors, he wrote, might have a stabilizing effect.

But these ideas are far from mainstream, and the industry has been slow to change. A fourth of investors surveyed by Rothstein Kass said they expected their allocations to women-run funds to increase “somewhat” in 2014, while 2 percent expected to allocate “significantly” more money.

Though the study expected more women to start their own funds in the coming years, the scarcity of such funds is itself an obstacle, a “chicken or the egg” problem, said Kelly Easterling, an audit principal at Rothstein Kass who contributed to the report.

“Without a large supply of funds, it’s difficult to achieve appropriate portfolio diversification or, for that matter, put enough money to work to move the performance dial,” she said in a statement quoted in the report. “On the other hand, until there is more money flowing to women-owned and -managed funds, it’s unlikely that there will be a stampede of new fund launches.”