Hedge Funds Face Mounting Pressure With Diversity Questionnaire

11 Nov 2020, 10:48 AM IST

(Bloomberg) -- Two institutional investors with more than $10 billion of assets are joining a growing movement to compel hedge funds and other asset-management firms to be less White and less male.

The Kresge Foundation and the John D. and Catherine T. MacArthur Foundation will send a standardized questionnaire to all of their money managers to measure the diversity of their ownership, leadership and workforce.

Since the beginning of the year, the $194 billion New York State Common Retirement Fund and $420 billion California Public Employees Retirement System have started similar programs. Last month, Yale University’s $31 billion endowment said it would survey its managers, too.

The ultimate goal of these institutions is to steer their money toward more diverse managers -- and reject firms that fail to make progress on that front. What’s driving them isn’t just the desire for racial and gender equality, the institutions say. Diversity of thought, background and beliefs leads to better investment decisions and better returns.

“Firms listen to their limited partners and it’s our responsibility and we think it’s important to lean on them” to help bring about change, said Robert Manilla, chief investment officer for Troy, Michigan-based Kresge, which has $3.7 billion across 150 active managers.

‘Diverse Candidates’

That the industry needs a push is clear. A 2017 Knight Foundation study found that women and diverse-owned firms managed just 1.1% of the $71 trillion total assets under management even after three decades of emerging-manager programs that mostly failed.

“There’s this perception that there’s all this capital there for diverse managers and that a guy like me should be swimming in this money,” said Troy Dixon, who founded Hollis Park Partners, one of the largest Black-owned hedge funds with about $700 million of assets. “The reality is not that. A lot of these programs are in my opinion tangential or ill-conceived and so don’t really manifest themselves into real capital for diverse candidates.”

Even after Black Lives Matter and racial justice protests prompted corporate America to pledge to increase diversity, minority- and women-owned managers said it hasn’t translated into new allocations.

Like the California and New York state pension funds, Kresge and the $6.7 billion MacArthur Foundation are working with Lenox Park Solutions, a technology company that developed the standardized questionnaire. The foundations are aiming to get other institutions to join them in a pod that shares research and a list of money managers on Lenox Park’s platform.

Lenox Park founder Jason Lamin led a team of data scientists that designed the questionnaire. The company drills down into the makeup of the firms, collecting dozens of pieces of information, including the race and gender of owners and managers, and who has seats on the investment committee, voting rights and shares in the profits.

‘Diligent Investor’

Kresge started a program last year to have a quarter of its U.S. assets managed by diverse firms by 2025, and Manilla said he has seen firsthand how diversity can help a portfolio.

One of his Black managers, William Heard, started Heard Capital nine years ago and now oversees more than $300 million. Heard created a mentor network from scratch, an effort that a White man who jumped from Harvard to Goldman Sachs rarely has to think about.

“That determination and grit he had to have to get where he is with his firm makes him a very diligent investor,” Manilla said.

Many institutions are secretive about who manages their money, and the fact that groups of investors will be sharing their picks may help those firms get new clients. Prudential Financial Inc. leads a diverse and emerging manager pod on the Lenox Park platform and has shared data on funds run by 35 managers, 20 of which have already gotten meetings from other members of the group, Lamin said.

Stanford Study

Scholars, including a group at Stanford University, found that investors have biases against firms run by women and minorities. Founders of diverse firms agree, saying investors tend to take longer to give them money, allocate less capital to them and demand better pricing than from White-owned firms. Lamin said he plans to collect data from investors, including the language they use in describing the managers they meet, to highlight their own biases.

Progress will be slow. Lamin started selling his scoring project a year ago, but there’s just one pension fund, which he declined to identify, that formally uses the score as a factor when choosing among competing managers.

“I want to compete -- the stock market is a meritocracy,” Heard said. “There is still some distance to cover before the process of determining who gets to compete in the stock market can be called a meritocracy.”