- Women and minorities control a fraction of US investments.
- High minimum asset thresholds prevent smaller funds from getting off the ground.
- Consolidating multiple funds under a central diversity-orientated platform could help solve the problem.
Diverse investment portfolios can reduce risk, promote innovation and improve returns.
But as we begin 2020, despite equal or better performance, women and minority-owned firms control just 1.3% of all US-based assets under management. And the statistics have not changed in a decade. Without a solution to this persistent problem, the under-representation of women in asset management will continue.
Here's a solution: launch a Variant Perspectives platform that addresses the barriers to entry perpetuating the status quo.
Scale, not performance, has become the best indicator of a fund’s success. Lower fees and higher operating expenses have driven industry consolidation to historic highs. When it comes to passive asset management, three firms – Blackrock, Vanguard and State Street – now control 80% of the market in exchange traded funds. When it comes to active management, “90% of all hedge fund assets are managed by just 10% of the hedge fund firms.”
The minimum viable asset under management (AUM) level has become so high that few emerging funds are able to succeed, especially ones owned by women. In 2015, research found the average AUM of a female-owned fund is $115 million. To put that number in context, Goldman Sachs Prime Brokerage Division says, “Break-even AUM for a single standalone hedge fund is +$150 million. Furthermore, hedge fund launches with less than $250 million in AUM have a less than 50% chance of survival. Survival rates improve to 62% for hedge funds that launch with $250 million to $500 million and jump to 84% for launches over $1 billion.”
There was only one $1 billion hedge fund launch in 2019. The level of assets industry legends were able to launch their funds with would not be possible today. For example, George Soros launched the Quantum Fund in 1970 with $12 million in AUM, while Seth Klarman launched Baupost with $27 million in 1982.
Even well-intentioned investors exacerbate the problem. Institutional investors often tell me they would like to invest in female-owned investment funds, because they like innovative strategies, different approaches, the performance history and investment thesis emerging firms offer.
However, the same investors then request that these firms return when they have $500 million in AUM, as they are prohibited from investing in sub-scale concerns. Institutional investors need to deploy at least $50-250 million for an investment to be meaningful in their portfolio. In addition, their investment cannot be a disproportionately large percentage of the firm’s assets. This creates a catch-22 for both the institutional investor and emerging manager.
How does the Variant Perspective platform incubate diversity?
The purpose of the platform is to discover, vet and provide acceleration capital and world-class operational and distribution support to promising female investment managers. In order to achieve proof of concept and economies of scale, the platform requires a collective commitment of $1 billion in assets from three to five backers, which will be used to accelerate five-10 emerging funds.
How does Variant Perspective reduce the minimum viable AUM?
By centralizing and sharing fixed operational and distribution costs (as mega managers do), Variant Perspective emerging managers gain superior support for less than they could afford as a standalone fund, while mitigating many of the perceived risks institutional investors associate with emerging managers. Minimum viable AUM for a long/short equity fund falls from $150m to $75m on the platform.
How does Variant Perspective generate higher returns?
By reducing the minimum viable AUM of a fund, smaller, capacity-constrained, alpha-generating strategies become sustainable for the manager and investible for the institutional investor. As the 2013 Beachhead Capital Study shows, “Small firms outperformed big firms by 2.54% and 2.20% per annum over five and 10 years, respectively.” Similarly, City University London analyzed 7,261 hedge funds (including those that closed) and concluded that over a 20-year period “the behemoths averaged a 7.32% return, versus 9% for the smallest portfolios.”
How does Variant Perspective increase diversity?
The probability of success for women fund managers will increase when they are provided with reliable access to capital, their funds are at scale and all operational institutional investment prerequisites are met.
How does Variant Perspective attract and retain top talent?
The founders of today’s mega managers are not as fair as they could be with compensation because the threat of disgruntled talent leaving to set up a standalone fund has diminished as barriers to entry have risen. In contrast, our model adopts a multistakeholder approach by divvying up management and performance fees in a more equitable manner. Top talent becomes free to reach its full potential.
How does Variant Perspective help institutional investors invest at scale in diversity?
Institutional investors can fulfill their diversity mandates by investing a substantive sum with the platform. The subdivision of their investment between as many of the underlying managers as they favour makes smaller funds with higher returns accessible to them.
How large is the Variant Perspective market opportunity?
It is highly scalable and applicable to all geographies and asset classes. If the top 20 pension plans globally committed 1% of their equities, fixed income and hedge fund allocations towards diversity platforms, AUfM (assets under female management) would increase by $75 billion.
Emerging managers: Variant Perspective invites portfolio managers to apply to join the platform, which provides support services at scale that are affordable and mirror industry best practices. It empowers women portfolio managers to build sustainable businesses while giving them the visibility and institutional credibility their performance merits.
Institutional investors: The platform creates opportunities for institutional investors to meet their targeted investment returns as they gain the benefits of cognitive diversity at scale in their investment portfolios.
Platform backers: The platform is an opportunity for backers to invest in a democratizing, disruptive and highly scalable concept that is both highly profitable and impactful.
What's the World Economic Forum doing about the gender gap?
The World Economic Forum has been measuring gender gaps since 2006 in the annual Global Gender Gap Report.
The Global Gender Gap Report tracks progress towards closing gender gaps on a national level. To turn these insights into concrete action and national progress, we have developed the Closing the Gender Gap Accelerators model for public private collaboration.
These accelerators have been convened in Argentina, Chile, Colombia, Costa Rica, Dominican Republic, Panama and Peru in partnership with the InterAmerican Development Bank.
In 2019 Egypt became the first country in the Middle East and Africa to launch a Closing the Gender Gap Accelerator. While more women than men are now enrolled in university, women represent only a little over a third of professional and technical workers in Egypt. Women who are in the workforce are also less likely to be paid the same as their male colleagues for equivalent work or to reach senior management roles.
In these countries CEOs and ministers are working together in a three-year time frame on policies that help to further close the economic gender gaps in their countries. This includes extended parental leave, subsidized childcare and removing unconscious bias in recruitment, retention and promotion practices.
If you are a business in one of the Closing the Gender Gap Accelerator countries you can join the local membership base.
If you are a business or government in a country where we currently do not have a Closing the Gender Gap Accelerator you can reach out to us to explore opportunities for setting one up.