Diversity and Inclusion and the Battle for Talent

Three key areas a fund should focus on to drive performance

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Business Strategist
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April 20, 2020

From the passing of Title VII of the Civil Rights Act of 1964, to the recent news that Goldman Sachs will no longer do IPOs for companies with all-male boards, diversity and inclusion in the workplace has certainly evolved, yet still has a long way to go, particularly for the financial services industry.

According to AIMA and Ernst & Young’s 2019 paper on Diversity and Inclusion, an average hedge fund is roughly 80% male.  Senior leadership is 90% male and roughly 95% of founders are male with less than a 10% chance of meeting with a member of an ethnic minority.

The ethical argument for diversity and inclusion is strong, but emerging data now indicates the business case is even stronger.DDI’s Global Leadership Report showed organizations that have at least 30% women in leadership roles are 12 times more likely to excel financially.  Boston-based consulting firm, Quantopian conducted a study comparing performance of Fortune 1000 women CEOs to the returns of S&P 500 enterprises, finding the 80 women CEOs produced 226% better than the S&P 500.  BCG and MassChallenge conducted a study on women founders showing women-led start-ups outperformed their male counterparts, despite receiving less money; for every dollar raised, women generated 78 cents in revenue, compared to 31 cents for men.

The cost of not “buying-in” to D&I is also worth noting, with research into venture capital firms showing the more homogenous a firm’s leadership is, the lower their investment performance. 

When it comes to diversity and inclusion, the challenges and barriers hedge funds face are somewhat unique.  Diverse talent pools are not created overnight and funds face even more headwind in the fight by sourcing most candidates from the financial services/investment banking industries.  Evolving business needs have only exacerbated this, with a continued push to hire from quantitative degrees.  Not only are funds fighting to take this talent from tech giants like Google and Amazon, these degree programs typically have even lower levels of gender diversity than finance degrees.  

While a hedge fund’s challenges are unique, the struggle and inherent value of top talent is universal.  In 2018, Development Dimensions International conducted a study with more than 1,000 C-level executives worldwide.  When choosing between 28 challenges (ranging from global political uncertainty to climate change to global recession), the C-suite overwhelmingly rated their top challenges to be “Developing ‘Next Gen’ leaders” and “Failure to attract/retain top talent.”

As a fund evolves to keep up with a rapidly changing business environment in an increasingly competitive and cross-industry battle for talent, the challenge of diversity and inclusion can actually inadvertently become part of the solution. According to a recent study, 47% of Millennials actively look for diversity and inclusion when considering a job.

So how can a hedge fund become more diverse and inclusive?  The answer isn’t simple nor one-dimensional, but in order to drive progress in talent acquisition and D&I, a fund should focus on three areas:

  • Embedding inclusion within a fund’s culture.
  • Top-level leadership “buy-in”.
  • Innovating the benefits strategy.

Embedding inclusion into a fund’s culture
According to Harvard Business Review, numerous studies demonstrate diversity on its own doesn’t drive inclusion.  DDI’s Global Leadership Report showed organizations that have 1.4 times higher sustained profitable growth, do not just hire diverse candidates, but they also embed inclusion within their culture and leadership, valuing multiple perspectives to determine success. 

HBR’s Center for Talent Innovation’s research uncovered four areas that drive inclusion in the workplace: inclusive leaders, authenticity, clear career paths and networking and visibility.  Working with a broker or consultant to assess where your firm is currently at in the process can help you build a strong path forward.

Top-level leadership “buy-in”
Inclusive leaders are a key component to creating “inclusion” in the workplace and without backing and executive sponsorship of diversity and inclusion from the top, organic engagement that cultivates innovation and business growth will not happen.

Innovating the Benefits Strategy
According to AIMA, another talent headwind that funds face is the inaccurate preconceived notions of what the finance industry looks like: 20-hour days, aggression and a rigid culture.  As a result, funds are now beginning to adapt their culture and benefits offerings to reflect that of their biggest talent competitor: Silicon Valley.

By putting calculated thought and analysis into areas like perks, pay, flexibility and inclusive benefits, firms can widen their talent pool, improve company culture and gain a competitive advantage in securing top talent.  Whether it is lifestyle-spending accounts, fertility treatment, paid paternity leave, or simply more effectively assessing and communicating current benefits offerings, a strategic and evidence-based approach is important. By working with a broker or consultant who uses custom benchmarking from both the tech and hedge fund industries (not financial services as a whole), a firm can better differentiate, innovate and align the benefits package to attract the right candidates that may be getting overlooked today.

Ultimately, there is no one-size fits all approach and it is important to apply an agnostic data-centric approach that objectively weighs the risks of maintaining the status quo against the potential returns of innovation.