[SKBI Newsletter] Challenges and Benefits of Diversity | Oct 2024

SKBI Newsletter | October 2024  

Challenges and Benefits of Diversity

Research Perspective

Industry Insights

Melvyn Teo
Lee Kong Chian Professor of Finance at SMU

Danny Yong
Chief Investment Officer at Dymon Asia Capital

The hedge fund industry is primarily interested in financial performance. Could diversity add value to such a competitive and savvy industry? According to the findings of a recent SMU study, the answer is yes.

Identifying the characteristics or metrics contributing to a company, team, or individual’s success can be both important and challenging. In a recent meeting, Danny Yong shared his experience and opinions on these topics.

Key Messages:

• Diverse hedge fund teams, in terms of educational institution, academic specialization, work experience, gender, and race, outperform homogeneous teams.

• By taking advantage of the heterogeneous skill sets of their team members, diverse teams exploit a wider range of investment opportunities. This leads to savvy stock selection skills and superior investment performance.

• Investors value diversity in fund management and allocate more capital to diverse funds.

Collectively, the study shows that diversity creates value even in highly competitive and performance-driven industries, such as the hedge fund industry. Of course, fund founders may not be able to establish a diverse team at fund inception due to search frictions or their limited experience. However, diversity matters for the long-term operation and success of many asset management companies.

Lu, Y., Naik, N.Y. and Teo, M., 2024. Diverse hedge funds. The Review of Financial Studies, 37(2), 639-683.

Key Challenges:

• Diversity in culture, gender, academic training, and market expertise contributes to better decision-making. When identifying talent, besides academic excellence, attitude, aptitude, and cultural fit are crucial considerations.

• Gender diversity offers valuable perspectives in risk management and portfolio analysis. However, the lack of female candidates remains a challenge in the asset management industry.

• Many global hedge funds also find it difficult to build a local talent pipeline in Asia. They might opt to bring in talent from outside of Asia as a temporary solution.

• As labour costs increase in Singapore, more companies are leveraging on automation by adopting AI to improve productivity.

Overall, as Danny reckons, “Embracing diverse talent and technological advancements are crucial for asset management companies as they navigate the complexities of the market.”

Meet the Author:
Prof Melvyn Teo, Lee Kong Chian Professor of Finance & Deputy Dean (Faculty), joined SMU in 2002 after completing a Ph.D. in Economics from Harvard University. His research interests lie in empirical asset pricing, hedge funds, and behavioural finance.
 

Meet the Expert:
Mr Danny Yong is the Co-Founder of Dymon Asia Capital. He is the Co-CIO of the firm’s flagship Multi-Strategy Investment Fund (MSIF) and sits on the investment committee of Dymon Asia Private Equity. He has been on the SKBI Advisory Board since 2019.
 

About SKBI:

The Sim Kee Boon Institute generates financial economic research through multidisciplinary collaborations involving not only the SMU community, but also research talent from around the world as well as industry and public-sector partners. The Institute will focus its efforts on the areas of (1) Market Innovations and FinTech, (2) Sustainability and Green Finance, and (3) Household Finance and Behaviour. To maintain relevance to finance practitioners and policy-makers, SKBI also adopts a view on Asian and global economic trends. View SKBI’s research. 

About the SKBI Newsletter:

This monthly newsletter provides a unique platform to connect academic researchers and industry experts. It aims to enhance the outreach of academic studies, while fostering dialogue on key insights and challenges and stimulating new ideas and collaborations.

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