Diverse Hedge Funds

Review of Financial Studies, forthcoming

68 Pages Posted: 18 Feb 2021 Last revised: 21 Jun 2023

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

Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers that simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management.

Keywords: Diversity, Homophily, 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). Review of Financial Studies, forthcoming, 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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