Race, Discrimination, and Hedge Funds

55 Pages Posted: 8 Apr 2022 Last revised: 25 Jul 2022

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: March 30, 2022

Abstract

Minority operated hedge funds deliver higher alphas, Sharpe ratios, and information ratios than do non-minority operated hedge funds. Moreover, minority fund managers attended more prestigious schools and are more likely to hold post-graduate degrees. Yet, minority managers garner lesser start-up capital and attract lower investor flows. Racial homophily drives investors' appetite for non-minority funds. To address endogeneity, we leverage on an event study of minority manager fund transitions and an instrumental variable analysis that exploits racial imprinting during childhood. Our results extend to actively managed equity mutual funds and suggest that racial minorities face significant taste-based discrimination in asset management.

Keywords: Race, Racial bias, Discrimination, Barriers to entry, Minorities, Homophily, Education, Hedge funds, Asian, Black, Latino

JEL Classification: G23, J7, J15

Suggested Citation

Lu, Yan and Naik, Narayan Y. and Teo, Melvyn, Race, Discrimination, and Hedge Funds (March 30, 2022). Available at SSRN: https://ssrn.com/abstract=4070484 or http://dx.doi.org/10.2139/ssrn.4070484

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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