Diverse Hedge Funds

Abstract

We explore the value of diversity for hedge funds. We show that fund management teams with heterogeneous educational backgrounds, work experiences, nationalities, genders, and races, outperform homogeneous teams by 3.24% to 7.96% per annum after adjusting for risk. We address endogeneity concerns through (i) difference-in-differences estimates from an event study of diversity-enhancing team transitions and (ii) instrumental variable regressions that exploit the demographic diversity at fund founders' hometowns. Diverse teams outpace homogeneous teams by exploiting a greater variety of long-horizon investment opportunities, avoiding behavioral biases, and eschewing downside risks. Diversity allows funds to circumvent capacity constraints and deliver more persistent performance.

Keywords: Diversity, Homophily, Nationality, Experience, Education, Gender, Race, Ethnicity, Behavioral biases, Capacity constraints, Performance persistence, Operational risk

JEL Classification: G20, G23, I20, J15, J16, J24, M14