“Is the contemporary US hedge fund industry like a feudal aristocracy?” This was one of the lively questions that arose during the final 2017-2018 Faculty Fellows lunch at the Clayman Institute for Gender Research. Megan Tobias Neely, a Postdoctoral Fellow at the Clayman Institute, presented her research on how trust and loyalty are two key factors through which risks and rewards are unequally distributed in the hedge fund industry.
Neely spent 4 years immersing herself in the industry, primarily in New York City, gaining unprecedented access to numerous industry events that are typically closed to outsiders; she observed hedge fund offices; and she conducted in-depth interviews with 45 hedge fund employees.
The hedge fund industry, Neely explains, is an opportune place to study the drivers behind the astronomical growth in income inequality in the United States. Since 1980, the top 1% of earners have doubled their income. Strikingly, 89% of the top 1% of earners are men, and almost 91% are white. Not all of the 1% of top earners work in the hedge fund industry, of course. But this $3.2 trillion industry – where entry-level employees earn an average of $372,000 a year and portfolio managers earn an average of $2.4 million a year – provides a lens to understand how privilege is produced and hoarded in elite contexts. Hedge funds run by white men manage 97 percent of industry assets.
Common rhetoric suggests that white men are top earners, especially in the male-dominated hedge fund industry, because they are more willing to take high risks, which pay off in terms of high rewards, adding to their wealth. Neely points out that within the industry, men and women actually have similar approaches to risk-taking. If proclivity to riskiness doesn’t explain why white men dominate and thrive at hedge funds, what does?
Neely’s research identifies trust and loyalty as two key factors through which white men, but not women of any race or men of color, leverage lucrative careers. White men do so despite making risky decisions that often do not pay off. When it comes to trust – the ability to be vulnerable in the face of uncertainty – white men are most successfully able to garner others’ trust. Presenting the case of Brian (all names in the study were pseudonyms in order to protect the identity of participants), a white man with an Ivy League MBA in his 50s, Neely explained that Brian had described being able to launch his one-man hedge fund because people found him “trustworthy.” From his personal and professional networks, Brian received seed investments, primarily from a network of men investors: fathers of his ex-girlfriends, the father of his former boss, and connections through his own father. In the 2008 financial crisis Brian’s fund also collapsed, but when he started a new one soon after, the same people who had originally invested with him did so again. Despite extensive losses, they continued to see him as a capable and trustworthy investor. Contrast this with the case of a woman who was not deemed a good investor by men decision-makers because she was seen as too risky, although the vast majority of her investments had yielded profitable results. Trust, Neely adroitly shows, is more accessible to white men, and contributes to their success in the hedge fund industry.
This research shows that loyalty plays an important role. Hedge funds have a suite of social rituals such as celebrating as a group the first time someone loses $1 million on a trade, poker nights, and Karaoke events. But women reported feeling excluded from these bonding rituals that bring men closer together. One participant in the study, Karen, a white woman, for example, was certain this exclusion meant that she had recently been denied a promotion.
Loyalty also matters because informal apprenticeships provide an important pathway to a burgeoning career in the industry. Typically, a senior portfolio manager will single out entry-level managers whom they see as having potential. Sometimes, the protégé will simply be the senior manager’s adult son – keeping it all in the family. Neely found that loyalty amongst white men meant that new fathers were more likely to get a “daddy bonus” (in the tens of thousands of dollars), which was typically attributed to the costs of raising a family in New York City. In contrast, women’s requests for higher salaries were often denied. Sasha, a Black woman, reported that when she asked for a higher salary, she had been directly told that, “I should be grateful for the job.” Loyalty proliferates amongst white men in the industry and serves to protect and further their careers; but women and men of color are actually often excluded from this cult of loyalty.
Neely’s research illuminates key ways in which even elite women and men of color are nonetheless kept out of the most privileged bastions of the hedge fund industry. These positions are carefully protected by white men. Until this changes, a simple Google search of “hedge fund managers” will continue to reveal a sea of men’s faces.