Diverse Hedge Funds

65 Pages Posted: 18 Feb 2021 Last revised: 24 Nov 2021

See all articles by Yan Lu

Yan Lu

University of Central Florida - College of Business Administration

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: February 5, 2021

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

Suggested Citation

Lu, Yan and Naik, Narayan Y. and Teo, Melvyn, Diverse Hedge Funds (February 5, 2021). Available at SSRN: https://ssrn.com/abstract=3779713 or http://dx.doi.org/10.2139/ssrn.3779713

Yan Lu

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 70008223 (Phone)

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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