Race, Discrimination, and Hedge Funds

Abstract

Minority operated hedge funds attract lower start-up capital and investor flows. Yet they deliver higher alphas, Sharpe ratios, and information ratios relative to non-minority operated hedge funds. Moreover, minority managers are more likely to attend prestigious colleges, receive specialized education, eschew downside risk, and exhibit trustworthiness. Racial homophily drives investors' preference for non-minority funds. An event study of minority manager fund transitions, instrumental variable regressions that exploit childhood racial imprinting, and an analysis of minority managers with non-White sounding first names address endogenity. Our results reveal 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