U.S. Markets

Check your fund manager’s privilege: James Saft

(Reuters) - You might want to consider firing your money manager in favor of a woman or someone from a less wealthy background.

Two recent studies highlight that mutual fund managers from less affluent backgrounds and seasoned hedge funds with female managers both outperform.

Maybe the movie “Trading Places,” in which a homeless man ran rings around affluent financial executives, wasn’t so far fetched after all.

The argument here isn’t that women or those with less family money enjoy some inherent advantage as money managers, but that in order to break in and build a career they must be made of finer stuff.

A study of U.S. mutual fund managers released in February hand-collected census data on the households in which managers grew up in order to measure how family background relates to performance.

As you might expect, fund managers, as a group, come from wealth. Their fathers’ incomes are in the 90th percentile, they grew up in houses worth double the local median and were more likely to go to private schools and expensive universities, according to the study.

All of those advantages are some of the reasons they were well positioned to get to work in a highly paid and competitive industry like fund management. But while their families’ investment in them has paid off, how are their clients doing?

Not quite so well, it seems. Fund managers from families in the top 20 percent of parents’ income underperform those from the bottom 20 percent by 1.54 percentage points annually by a standard measure of risk-adjusted return, the study found.

“We argue that managers born poor face higher entry barriers into asset management, and only the most skilled succeed. Consistent with this view, managers born rich are more likely to be promoted, while those born poor are promoted only if they outperform,” Oleg Chuprinin of University of New South Wales and Denis Sosyura of University of Michigan write in the study.

Those from wealthier backgrounds have an easier time getting additional funds or being transferred to work at larger funds but those from poor backgrounds have to outperform to get the same rewards. “A manager from the 25th percentile of parents’ income has to outperform a manager from the 75th percentile by about 0.74 percent per year to stand an equal chance of promotion,” according to the study.

There was some indication that managers from poorer backgrounds had more concentrated portfolios and traded more, perhaps indicating that they take on more risk to try to overcome other disadvantages.


There are, of course, some caveats here. The study uses data from the 1940 census to establish family background and was very rigorous about being sure about matching the right fund manager.

That leads to a small sample size, 208, with a bias towards older managers. It is possible that the industry has become more meritocratic in recent years.

A 2015 study of hedge funds found that only 2.6 percent in the sample were managed exclusively by women and 4.6 percent name any women as managers, again resulting in a fairly small sample size. There were only 439 hedge funds identified with any women managers over the 20 years covered by the study, carried out by Rajesh Aggarwal and Nicole Boyson of Northeastern University. (here)

Female-only funds do about as well as male-only funds, while mixed-sex teams seem to underperform both male- and female-only funds. What was striking was that among hedge funds that survive (and remember many hedge funds fail in the first few years), those with at least one female manager have better performance than male-managed surviving funds, despite having lower assets under management.

“Using media mentions as a proxy for investor interest, female-managed funds receive proportionately less attention. Our results suggest that there are no inherent differences in skill between female and male managers, but that only the best performing female managers manage to survive,” the authors write.

Among surviving hedge funds, those with female management had a buy-and-hold annual return of 7.52 percent against 6.69 percent for male firms. Female-run hedge funds also produced more risk-adjusted outperformance, doing better by about 0.60 percentage point annually.

Again, though the sample size is smaller than ideal, both studies seem to indicate a truth that is easy to imagine: that people who cross major boundaries, in this case of gender and economics, to pursue their careers face high hurdles.

That winnowing process only allows the best to get through.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at

Editing by James Dalgleish