When I challenge investors to name famous money managers, I inevitably hear names like George, Julian, Warren and Steve. In fact, unless I specifically ask the investor to name a female money manager, the answer is never a female moniker. However, as the old saying goes, "The rooster may crow, but the hen delivers the goods," and new research is showing that wisdom may also apply to investment returns.
My research for Rothstein Kass showed that women-run hedge funds and private equity funds outperformed the hedge universe at large by a margin of six percentage points over six-and-a-half years. A recent study by Kyria Capital highlighted that women-run hedge funds are more likely to produce top-quartile performance, although a June 2015 Morningstar Inc. study was less conclusive. However, by examining the entire body of performance research on female retail and professional investors, it is easy to see a consistent and compelling trend toward outperformance.
At the very least, research shows that women and men approach investing differently. Biology plays a significant role in investing behavior as hormones like testosterone and cortisol impact risk taking, stress responses and confidence levels. Cognition also plays a role. Studies show that women tend to be less overconfident, have a flatter probability weighting curve and may do a better job of matching expected outcomes with actual outcomes.
When combined, biology and cognitive factors create differentiated behavior, and of course, differentiated results. Women trade less than men (due to less overconfidence), and they are very adept at maintaining conviction, even in the face of significant market noise. One study from the Vanguard Group Inc. showed that women were 10% less likely to abandon their investments during the most recent market meltdown. Female investors also generally “stick to their knitting” and are very adept at maintaining a consistent strategy. Those strategies often include less trendy, longer-term investments, which may mitigate volatility.
Despite offering differentiated performance, the number of women in the financial industry remains low. Less than 30% of RIAs and CFPs are women. Morningstar's study concluded that women comprise less than 2% of the mutual fund world, and my research shows that there are 11 men named John, James, William or Robert for every one female hedge fund manager.
And this lack of women may not just be unsettling, it may be decreasing returns and increasing volatility.
BEHAVIOR IMPACTS INVESTMENT PERFORMANCE
Most investors will agree that behavior impacts investment performance. Whether it's the behavior of the individual investor, the investment adviser with whom they work, the money managers to whom they allocate or even the broad market, macro-economic behavior (like the January effect or market bubbles), you can't escape the fact that behavior matters when it comes to investing.
If we accept the ever-growing body of research that shows women offer a significant source of alpha, as well as the research that shows diversified investment behavior, it seems like we are leaving money on the table. If we diversify portfolios by geography, liquidity, number of investments, asset classes and other factors, why don't we also consider diversification from a behavioral and gender point of view?
In the future, I hope that more investors will consider behavioral and cognitive alpha and diversification when investing. In fact, for those advisers who service investment clients, it may not be something that can be ignored. Research shows that women will control 66% of the investable wealth by 2030, and one in three high net worth investors is already a woman. Understanding how women think and invest will only become more important with time. Luckily, it already pays to invest in the broad market.
Meredith Jones is the author "Women of the Street: Why Female Money Managers Generate Higher Returns (and How You Can Too)" and an alternative investment consultant who previously served as director of research at Van Hedge Fund Advisors International and director at Barclays Capital Strategic Consulting Group.